Credit derivatives are one of the most interesting products developed in the OTC derivative market in quite some time. They offer a means for counterparties to directly adjust credit exposures to specific firms or to diversify industry or geographic concentrations. Their potential is enormous because credit risk is the major risk faced by financial service firms. Credit derivatives' growth to date, however, has been fairly limited, and this limited growth can be traced to deficiencies in some of these supporting factors. Data to price the instruments is relatively poor.
Analysts typically look to corporate bonds, but historical data on bonds are fairly limited.
Information on loan values is even more difficult to obtain. The growth of credit derivatives also has been constrained by the lack of hedging instruments. There really are no exchange-traded instruments that can be used to effectively hedge credit risk. Given my earlier association with exchange-traded markets, I am surprised that this profit opportunity has not yet been exploited. It illustrates, no doubt, the difficulty of overcoming the impediment of data availability and of pricing credit risk.