The Role of Derivatives in Credit Risk Management: Theoretical Analysis and Empirical Evidence

This thesis examines the use of derivatives in credit risk management, namely in credit risk transfer and hedging and portfolio diversification. In particular, it provides an exhaustive theoretical overview of credit risk management and explores the potential applications of derivative instruments, especially credit default swaps (CDS), as a form of insurance against the probability of default of borrowers. Finally, it offers an historical perspective of the CDS market and, through an empirical analysis, it investigates the crucial relationship between the credit default swap and the equity markets. This study reveals a clear negative correlation between the fluctuations in the level of the credit spreads and the stock prices movements over time.