Financial Risk Manager Part 1

Credit derivatives are primarily used to transfer the risk from one party to another. They are financial contracts that allow a creditor to transfer the credit risk of an underlying portfolio of securities to another party without transferring the underlying portfolio itself. This is achieved through a variety of credit derivative products, such as credit default swaps, credit linked notes, and total return swaps. These products provide a mechanism for managing credit risk by transferring it to another party who is willing and able to bear that risk. This transfer of risk can help to reduce the potential for losses due to credit events such as default, bankruptcy, or restructuring.

Choice B is incorrect. Credit derivatives are not used to increase the risk for larger returns. They are primarily used as a tool for managing and mitigating credit risk, not amplifying it.

Choice C is incorrect. The purpose of credit derivatives is not to postpone the risk for both parties in the transaction. Instead, they allow one party (the buyer) to transfer specific credit risks to another party (the seller).

Choice D is incorrect. While credit derivatives can help manage risk, they do not eliminate it entirely for both parties involved in the transaction. The seller of a credit derivative assumes the potential default or downgrade risk from the buyer, hence there's still an element of risk involved.