Risks of credit derivatives

When used properly, credit derivatives can help diversify credit risk, improve earnings,
and lower the risk profile of an institution. Conversely, the improper use of
credit derivatives, as in poor lending practices, can result in an imprudent credit
risk profile.
Credit derivatives expose participants to the familiar risks in commercial banking;
i.e. credit, liquidity, price, legal (compliance), foreign exchange, strategic, and reputa
tion risks. This section highlights these risks and discusses risk management
practices that can help to manage and control the risk profile effectively.