Credit derivatives allow FIs to hedge credit risk on individual assets,but not on portfolios of assets.

Question

Quizplus · Accepted Answer

This statement is false. Credit derivatives not only enable FIs to hedge credit risk on individual assets but also on portfolios of assets. Credit derivatives such as credit default swaps (CDS) can be used to hedge the credit risk of a portfolio of assets, such as a bond portfolio or a loan portfolio. By entering into a CDS on the portfolio, the FI can transfer the risk of default of the portfolio to the counterparty of the CDS.

Credit Derivatives Allow FIs to Hedge Credit Risk on Individual