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Credit derivatives are the latest tools in the management of the credit risk portfolio. Credit derivatives have grown considerably because they provide an effective mechanism for the exchange of credit risk. While modern banking is built on the sensible notion that a loan portfolio is less risky than a single one, banks still tend to focus too much geographically or in certain sectors: industrial, commercial or financial. An example could be the Credit Default Swap contracts (CDS). Credit default swap is a swap that transfers the potential loss of the reserve assets by the occurrence of events related to the counterparty (bankruptcy, failure to pay debts, insolvency, lower credit ratings).
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