Credit derivatives allow FIs to reduce credit risks without removing loan assets from their balance sheet.

Question

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Credit derivatives are financial instruments used to transfer credit risk from one entity (the seller) to another (the buyer). FIs can use credit derivatives to reduce their credit risk exposure without actually selling off loan assets from their balance sheet. This allows the FI to maintain its loan portfolio while still managing its risk.

Credit Derivatives Allow FIs to Reduce Credit Risks Without Removing