Banking on the Future: How Credit Derivatives Revolutionize Risk Management
Credit risk is a big concern for banks, and managing it is tricky. This study looked at how banks can use derivatives to hedge against credit risk in their loan portfolios. By using a special model, the researchers found that the bank's actions are influenced by their preferences, risk premiums, and the variability of loan rates and hedging instruments. This helps banks make better decisions about loans, deposits, and hedging strategies.