Credit risk is the risk that a borrower will be unable to meet his contractual financial obligations to the lender. Credit derivatives allow banks to avoid a significant portion of the credit risk by transferring it to insurance companies, i.e. the issuers of these instruments. Credit derivatives enable the development of a more flexible, efficient, and resilient financial system and have a significant impact on the entire financial market, both in credit risk trading and in increasing the complexity of financial transactions. The story of AIG before the 2007 financial crisis demonstrated that the reckless use and excessive issuance of credit derivatives can have catastrophic consequences for both the insurance company selling them and the entire market. In response to the financial crisis, numerous measures were taken to regulate the financial system and credit derivatives, including increased oversight of the securitization process, which financial institutions extensively exploited in the period leading up to the financial crisis. The aim of these measures was to increase transparency and accountability and to reduce the risks associated with complex financial instruments. Risks must be carefully monitored and risk measurement systems regularly updated.
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