Credit, Credit Derivatives, and Credit Default

Abstract

After some empirics we want to build up some theory. This will be done in this and the next chapter. As shown in ch. 19, one of the accelerating and magnifying forces in the recent financially driven boom-bust cycle seems to have come from credit and credit derivatives. Before going into the securitization of debt instruments, which played an important role in the financial meltdown of the years 2007-9, we want to discuss some basics of credit derivatives. The securitization of debt instruments will be discussed in ch. 21. In this chapter we will pursue what has been called the value based approach to credit and credit derivatives.