Protect your business against the risk of a third party’s credit default
Investing your treasury surpluses in corporate bonds can be an interesting option. You get an attractive interest rate during a fixed period and the secondary market offers you the opportunity to sell, if you don’t want to hold to maturity. However, the company you lend your money to might face financial trouble, putting your money at risk. Credit default swaps allow you to mitigate your exposure to corporate credit (bonds, notes, loans or commercial paper).
In a credit default swap, one party (the buyer) buys protection and the other party (the seller) sells credit protection. The buyer pays a premium at preset intervals in return for the seller’s guarantee to make a payment if a negative credit event takes place. There are basically three kinds of credit events: bankruptcy, failure to pay and debt restructuring.
Credit default swaps can be used in many different ways, and speculation by hedge funds has boosted the credit derivative market. First and foremost, however, credit default swaps are flexible instruments to hedge bond positions against default.
Tenor, overprotection, underprotection and documentation are just a few of the specialised issues you have to reckon with when dealing with credit default swaps. You can benefit fully from BNP Paribas Fortis’ in-depth experience and expertise with this risk-mitigating instrument.