Application Research Of Credit Risk Mitigation Tool In Commercial Bank Business

In October2010, after a series of market analysis and comparingforeign credit derivative market development experience with Chinamarket reality, National Association of Financial Market InstitutionalInvestors (NAFMII) newly launched Credit Risk Mitigation Tool (CRM),which is similar to Credit Default Swap (CDS). CRM products includecredit risk mitigation agreement (CRMA), the credit risk mitigationwarrant (CRMW) and a "2+N" Credit Derivatives Innovation system.However, since the launch of the products, the transaction volume islimited, CRM is facing the development bottleneck. From Commercialbank perspective, there is a positive significance to launch CRM products,whether the products is useful for CRM market participants and if it does,how to further apply CRM to diversify credit risk has become aconsiderable issue for NAFMII.The dissertation firstly gave a brief world historical retrospect of thedevelopment of credit derivatives, compared to the history of CRM, it’sobviously concluded that CRM product is still in the primary stage.Under this circumstance, this dissertation introduced two mainstream credit derivative pricing models, which are credit spread model andJarrow-Turnbull binomial tree model. Combined with the analysis ofthese two models, it found in the absence of default rate and recover rate,credit spread model is more suitable for CRM pricing. CRM exerts apositive influence on commercial bank credit management, client choice,capital allocation and arbitrage. After that, the application of credit spreadmodel on nine existing credit risk mitigation warrants demonstrate mostof CRMW were overpriced. Finally, the author affirmed the advantagesof CRM as well as recommended some suggestions on solving theproblems of CRM product and the external CRM market environment, inthe meantime, based on the debt solvency crisis of Shanghai Chaori SolarEnergy Science&Technology Company the author analyzed thedevelopment opportunities of CRM.Through the study of this dissertation, it has analyzed that CreditRisk Mitigation Tool is an useful credit derivative product forCommercial bank and other market participants to actively diversify andmanage credit risk depending on suitable pricing model used and thefurther improvement of China credit derivative market.