A bank has a limited geographic area of operations.It would like to diversify its loan income with loans in other market areas but does not want to actually make loans in those areas because of its limited experience in those areas.Which type of credit derivative contract would you most recommend for this situation?

Question

Quizplus · Accepted Answer

A credit swap is the most appropriate choice as it allows the bank to transfer credit risk associated with loans in other market areas to another party who is able to assume that risk in exchange for a fee. This way, the bank can earn income from loans in other areas without having to actually make the loans or assume the associated credit risk.

A Bank Has a Limited Geographic Area of Operations