CREDIT RISK of DERIVATIVES
1. Corporate Issues
The most common equity derivatives issued by companies are convertible bonds
and warrants. Unlike exchange traded futures/options and OTC options,
corporate issued convertible bonds and warrants are assets and not contracts.
1.1 CONVERTIBLE BONDS (CB's)
The credit risk of convertible bonds is reasonably straight-forward; if the bond
issuing company goes bankrupt, there is a good chance that the bonds will not
be redeemed.
There are a number of credit rating agencies that assess the the credit
worthiness of both issues and issuers. However, their scope is not
comprehensive, and there are many companies that remain uncovered by the
rating agencies.
1.2 WARRANTS.
Warrants are similar to ordinary shares in that credit risk is not really a concern
here.
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