3.Credit Insurance is designed exclusively to protect trade receivables. It protects a company against the risk of not being paid by its customers. List the three most commonly used ‘coverage types’ offered by insurance companies.Credit InsuranceDesigned exclusively to protect trade receivables, it protectsa company againstthe riskof not beingpaidby its customersafter a sale. The insurance policy paysa certain percentageof real losses incurredaftera buyer failsto payan invoicewithinthe termsthat had been agreed upon.Coverage Types1.Ground-Up Coverage: •Protection starts as losses start to occur•Efficient protection against the frequency risk and severity risk because even small losses are indemnified2.Stop-Loss Coverage:•Covers aggregate losses up till a certain amount•Large businesses3.Credit Limits: •Based on the financial information provided•Policy will cover losses in the aggregate based on this pool of receivables•The company will regularly update and review customer lists and debtors
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Topic 11 – Credit Derivatives; Collateral Debt Obligations; Bankruptcy1.There are predominant uses of CDs in the market. Discuss each strategy.Predominant Uses of Credit Default Swaps (CDs) in the Market:•Protection of a Credit Exposure•Investment in Credit: Long Credit•Speculation in Credit: Shorting CreditProtection of a Credit ExposureCredit Default Swaps were originally created to protect or hedge credit exposures. Today, simply hedging an exposure remains one frequent motivation of protection buyers.Investment in Credit: Long CreditThe motivation of most protection sellers is to make money by taking an exposure to credit risk. If the seller is comfortable with the creditworthiness of the reference entity and if the pricing is adequate for risk taken, the seller puts its capital at risk in exchange for CDs premium, earning a credit spread. Speculation in Credit: Shortening CreditInvestors can short a reference entity’s credit by buying a CDs without having an underlying exposure to protect. In particular, hedge funds often monetise a view on the credit trend of a company or of a country. The transaction delivers a profit in casethe reference entity deteriorates or defaults. The accumulation of short positions canresult in a run on a company or a run on a country.2.Collateral Debt Obligation (CDO) is a generic name for securitisation in which collateral consists of debt management. Provide examples of a CDO and discussthe two main families making up this cohort.Asset-Backed Security Credit Default Obligation StructureNegative Basis Trade for Super-Senior AAA/Aaa Tranche
3.Each country has its own bankruptcy law, however the laws function in more orless the same way. In the United States there are two main chapters of US Federal Bankruptcy law for commercial purposes. Discuss the similarities and differences between Chapter 7 (Alternative Estimations of Credit Quality) and Chapter 11 (Regulation).Chapter 7 – Alternative Estimations of Credit QualityAlternative Estimations of Credit Quality:We can now extract data from traded instruments, such as stocks or bonds, toestimate a Probability of Default. Given the global growth in the Credit Default Swap (CDS) market, we can extract valuable and precise information, on a real-time basis, about the perceived credit quality of companies.
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