The various credit derivative products:

• By-products on the defect risk: Pay Off related to a credit event (defect of payment, bankruptcy…): Credit Default Swap / Credit Linked Notes.
• By-products on the credit margin: enable a position during the purchase or sale on future evolutions of the credit spread, Spread Forwards / Credit Spread Option.
• By-products allowing to replicate the performance of a subjacent : enable to receive the economic performance of a stock without having to possess it, Total Rate of Return Swap.

1- Default by-products:

This category allows the buyer to gat a protection to cover himself against the incidence of one or many credit events. This category distinguishes itself by two types of products :

• Credit Default Swaps (CDS): The CDS is the most common credit derivative. It consists in transferring the credit risk of a subjacent asset between two counterparties.

The counterparty that wants to get rid of a credit risk buys protection and pays a periodical premium to the buyer. The buyer then promises to compensate any eventual loss in case a credit event affects the entity of the reference.

• Characteristics of CDS :
o Off balance-sheet tool
o Consensual contract
o Confidential contract
o Standard product
• Terms of remuneration :
o Physical Settlement (delivrable bonds for the nominal amount of the contract).
o Cash Settlement (Nominal payment of the swap value of the reference stocks market).
o Fixed pay out (Payment predetermined )
• Basket Default Swaps (First to Default) :
The protection buyer is covered against the first default among a basket of issuers.

• Credit Linked Notes (CLN): It is a structured stock combining a CDS to bonds or stocks of negotiable claims. It enables the buyer of this stock to take a display of bondholder type on the reference entity. During the transaction, the buyer of the protection issue stocks in counterpart of the exchange of the payment of a main thing and pay, in addition, a periodic voucher for the whole term to the investors. If the credit event, affecting the reference asset, does not come true , the buyer simply pays back the sum of the main thing. If it comes true, the CLN is executed causing either to a physical settlement of reference stocks or to a payment of a monetary differential.

2- Products based on the Spread:

It is about coverage tools against a variation of the Spread (a variation of the financing cost). The Spread measures the risk premium given of a reference asset by the market, in order to compensate the investors of the default risk of this stock.

We distinguish two types of derivative Credit Spread:

• Credit Spread Options
• The buyer of the protection covers himself against the variations, increasing or decreasing, of a CDS price. He buys the right to enter a CDS if a certain level of CDS is reached.
• The investor buys or sells the right to buy or to sell the credit at a determined SPREAD level on a given period.

• Credit Spread Forwards
• It is a contract of prefixing of a signature Spread on a risky referred bond. A payment will intervene at the due date, at the latest.
• It corresponds to the difference between the rate gap noticed on the market and the gap determined on the contract.
• This gap corresponds to the difference between the Forward rates on the funds vouchers and the Forward rates on the risky bonds.