The role of credit derivatives in the current financial crisis

Credit risk exposure is present in almost all financial transactions, and the credit derivatives are the latest instrument for the credit risk transfers between the counterparties, as well as the hedging and the credit risk management. Securitization and credit derivatives have created a synthetic securitization which allows for a broader implementation of credit derivatives, and in this way they are classified as investment products. They are bearing hidden risks, some of them impacting investors, some other ones the sellers of credit derivatives, and the third ones the entire financial system, mostly due to the fact that the credit derivatives market is still a new and insufficiently explored market. Credit derivatives had a significant role in spreading of the financial crisis and although they can not be entirely blamed for its eruption, they have certainly contributed to its strengthening. In spite of this, however, the opinion prevails that a correct use of credit derivatives can boost a renewed establishment of financial stability. Introduction and development of financial derivatives in Serbia should be approached with prudence, in order to avoid or at lease minimize potential reverberations of the current financial crisis. .