What is first-to-default credit derivative in SAP FS-BA-PM-CR - Credit Risk?

SAP Term: first-to-default credit derivative

• Component: FS-BA-PM-CR

• Component Name: Credit Risk

• Description: A first-to-default credit derivative is a protection that arises when the bank obtains a credit protection for a basket of reference names and the first default of one of these names triggers the credit protection. This credit event then also terminates the contract.

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• Key Concepts: 
  A first-to-default credit derivative is a type of financial instrument used to manage credit risk. It is a contract between two parties, in which one party agrees to pay the other a predetermined amount if a specified reference entity defaults on its debt obligations. The reference entity is usually a company or government entity.
  
  How to use it: 
  The first-to-default credit derivative can be used by financial institutions to manage their exposure to credit risk. It can be used to hedge against the risk of default by the reference entity, or to speculate on the likelihood of default. The terms of the contract are negotiated between the two parties, and can include the amount of payment, the reference entity, and the trigger event for default.
  
  Tips & Tricks: 
  When using a first-to-default credit derivative, it is important to understand the terms of the contract and the potential risks associated with it. It is also important to consider the creditworthiness of the reference entity, as this will affect the likelihood of default and the amount of payment that may be due.
  
  Related Information: 
  The FS-BA-PM-CR Credit Risk Management module in SAP provides tools for managing credit risk, including first-to-default credit derivatives. The module includes features such as portfolio analysis, stress testing, and risk monitoring. It also provides tools for calculating expected losses and setting up hedging strategies.