| Credit risk management is an important part of enterprise management, thus what is credit risk? Credit risk, also known as ensure risk, is a possibility that the financial institutions, investors or traders would take a loss when the borrowers, bond issuers or financial dealers can not honor an agreement because of various reasons. The financial crisis, which was beginning in August 2007 in the United States then engulfed the entire financial world, has caused economic recession. Some industries especially that depend heavily on credit consumption such as automotive trade are rapidly declining and loss incurred in many enterprises. The financial crisis has seriously affected the real economy, and it didn't only hit the U.S. but also the global economy. It's the biggest crisis since 1929. Financial crisis and default outbreak frequently prompt financial institutions to pay close attention to the default problem.For a long time, it's difficult to quantify and measure the credit risk because the benefit distribution of credit risk is biased, and it's hard to acquire data, and the credit risk is non-systematic. However, the credit default swaps, which is a credit derivative effectively transferring credit risk, solves the credit risk's liquidity problem, makes the credit risk be traded like the market risk, so transfers the surety's risk while reduces the difficulty and cost of issuing bonds.My motivation for writing this article is to develop credit default swaps in the Chinese financial market, credit default swaps is an effective instrument to transfer commercial banks' risk, and it's also a viable means to ease the financial crisis through the risk-sharing. Therefore, we should implement the inter-bank trade of credit default swaps firmly and steadily. In this paper I describe the related knowledge about the credit default swaps at beginning, then I make emphasis on the analysis of credit default swaps'pricing model, and use Reduced Form Approach to analyze the credit relationship between companies, and through a Structural Approach to solve pricing model the credit default swaps with counterparty. And announce the data and valuation results. In the end of this article, I analyze the shortcomings of the credit default swap market, summarize my work, and make recommendations on how to develop credit default swap market in china. |
