Technische Universität München Credit as an Asset Class - risklab

Chapter 3
Credit Risk Transfer Instruments
Numerous instruments can be used for credit risk transfer. We are particularly interested
in derivatives- or securitisation-based instruments. In the previous chapter, we learned
a lot about credit derivatives and securitisation in general. This chapter describes many
of the possible credit risk transfer instruments. Section 3.1 categorises derivatives- or
securitisation-based instruments, according to the dimensions unfunded/funded or single-
name/multi-name instruments. These instruments will be described during the course
of the chapter. The instruments covered, are credit default swaps (CDS)/credit default
options, total return swaps, credit spread options, basket CDS, portfolio CDS, credit linked
notes, collateralised debt obligations and CDS indices. The covered instruments, however,
are not meant to be exhaustive, as there are many product variations and continuous
innovations.
3.1 Derivatives- or Securitisation-based Instruments
Figure 3.1 gives an overview on derivatives- or securitisation-based credit risk transfer
instruments, which will be described in this chapter.
Figure 3.1: Derivatives- or securitisation-based credit risk transfer instruments
One can differentiate between the dimensions unfunded/funded or single-name/multi-
name instruments. When a protection buyer enters into a funded credit risk transfer
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