The tremendous growth of markets for credit derivatives since the mid 1990's has raised questions regarding the role of these instruments in the banking in- dustry which is heavily exposed to credit risk. However, while recent literature mainly focused on pricing and optimal decisions regarding...

The industrial organization approach to the microeconomics of banking augmented by uncertainty and risk aversion is used to examine credit derivatives and macro derivatives as instruments to hedge credit risk for a large com- mercial bank. In a partial-analytic framework we distinguish between...