Slaying the dragon (TT Jun05 p30-34)

Markets have evolved to help the treasurer deal with counterparty risk. One of the best ways of both assessing and managing counterparty risk is in the Credit Default Swaps (CDS) markets. CDS contracts differ from other derivatives in that their trigger events are driven by legal rather than market forces. Counterparty risk is not confined to big value deals. A well assessed and diversified portfolio of smaller counterparties can be hedged through securitisation and managed through a special purpose vehicle (SPV). Securitisation and credit hedging are some of the most effective tools that can be used to mitigate a large company’s counterparty risks.