Credit DerivativesCredit DerivativesCredit derivatives are instruments that allow lenders to pass on to others the risk that borrowers will default in return for a fee. In other words, credit derivatives are securitized in that the risk is transferred to an entity other than the lender. Examples of credit derivatives include credit default swaps, credit sensitive notes, and collateralized debt obligations. The value of these instruments is derived from the credit performance of the underlying party. Credit derivatives can be highly valuable for a company looking to spread and minimize risk.
These derivatives arose to hedge and diversify credit risk and as a means for taking on credit exposure. In 1989, Enron created its Credit Sensitive Note (CSN) as a way to make money in a difficult time. According to the case, these notes were designed to lower the price risk for bonds by paying a different coupon as the firms credit level changed. The coupon payments are linked to the S&P and Moodys credit rating of Enron itself. These unique types of debt paid interest rates that varied based on Enrons credit rating. When the rating was downgraded the coupon payments increased at a greater rate than when Enrons rating was upgraded. In other words, the coupon payments decreased at a slower rate when ratings improved than the larger rate when ratings worsened.
In 1989, the CSN and its “credentials” were released and Enron realized that credit risk had declined. As a result, in 1990 Enron decided to offer one of its CSNs to a portfolio of securities with a specific rating and to buy out a large fraction of its customers (up to 80% of which had to make a capital gain to earn an additional 20% in margin payments). Enron also made the CSNs more attractive by offering a different CSN based on credit ratings. Enron then released it as one of its securities with a rating of 100% at the same time, and the value of this CSN fell in value after the ratings received as a result of Enron’s decision.
In 1996, Enron announced that they were offering the CSN of the Securities of Enron, which it called, for a lower coupon rate. This triggered a series of changes.
In 1996, Enron revised the CSN for the S&S 0, which it called to reflect the lower coupon rate.
In 1996, Enron changed that CSN to 100%. In 2008 Enron announced that it was to sell off the CSN. It also announced that there will be a new credit rating assigned under its credit rating for an unknown number of years to ensure that credit risk does not continue to rise. According to a press release by the company, those who bought the CSN at the $1 or lower rate of interest paid it interest.
Enron’s history
Since its inception in 2003, Enron has had three very different portfolio types:
1) The Enron Standard 1 portfolio: This portfolio consists of the $1 or lower CSN of securities under Enron’s ownership. The Enron Standard 1 portfolio consists of the $5 or higher CSN of securities under Enron’s ownership. The Enron Standard 1 portfolio consists of the $2 or higher CSN of securities under Enron’s ownership. With the Enron Standard 1 portfolio currently under management, the rating that Enron used to calculate the CSN and rating it against Enron were merged to create the Enron Standard 1 portfolio.
2) The Enron Standard 3 portfolio: The portfolio consists of two $3 or higher CSN of securities under Enron’s ownership. The Enron Standard 3 portfolio consists of the $6 or higher CSN of securities under Enron’s ownership. The Enron Standard 3 portfolio consists of the $7 or higher CSN of securities under Enron’s ownership.
3) The Enron Standard 4 portfolio: The portfolio consists of an unspecified $3 or higher CSN of securities under Enron’s ownership. The Enron Standard 4 portfolio consists of an unspecified $5 or higher CSN of securities under Enron’s ownership. Enron’s share of the $5 CSN of securities under Enron’s ownership dropped at an incredible rate during the period that EMC’s rating was downgraded to its current level. The
In 1989, the CSN and its “credentials” were released and Enron realized that credit risk had declined. As a result, in 1990 Enron decided to offer one of its CSNs to a portfolio of securities with a specific rating and to buy out a large fraction of its customers (up to 80% of which had to make a capital gain to earn an additional 20% in margin payments). Enron also made the CSNs more attractive by offering a different CSN based on credit ratings. Enron then released it as one of its securities with a rating of 100% at the same time, and the value of this CSN fell in value after the ratings received as a result of Enron’s decision.
In 1996, Enron announced that they were offering the CSN of the Securities of Enron, which it called, for a lower coupon rate. This triggered a series of changes.
In 1996, Enron revised the CSN for the S&S 0, which it called to reflect the lower coupon rate.
In 1996, Enron changed that CSN to 100%. In 2008 Enron announced that it was to sell off the CSN. It also announced that there will be a new credit rating assigned under its credit rating for an unknown number of years to ensure that credit risk does not continue to rise. According to a press release by the company, those who bought the CSN at the $1 or lower rate of interest paid it interest.
Enron’s history
Since its inception in 2003, Enron has had three very different portfolio types:
1) The Enron Standard 1 portfolio: This portfolio consists of the $1 or lower CSN of securities under Enron’s ownership. The Enron Standard 1 portfolio consists of the $5 or higher CSN of securities under Enron’s ownership. The Enron Standard 1 portfolio consists of the $2 or higher CSN of securities under Enron’s ownership. With the Enron Standard 1 portfolio currently under management, the rating that Enron used to calculate the CSN and rating it against Enron were merged to create the Enron Standard 1 portfolio.
2) The Enron Standard 3 portfolio: The portfolio consists of two $3 or higher CSN of securities under Enron’s ownership. The Enron Standard 3 portfolio consists of the $6 or higher CSN of securities under Enron’s ownership. The Enron Standard 3 portfolio consists of the $7 or higher CSN of securities under Enron’s ownership.
3) The Enron Standard 4 portfolio: The portfolio consists of an unspecified $3 or higher CSN of securities under Enron’s ownership. The Enron Standard 4 portfolio consists of an unspecified $5 or higher CSN of securities under Enron’s ownership. Enron’s share of the $5 CSN of securities under Enron’s ownership dropped at an incredible rate during the period that EMC’s rating was downgraded to its current level. The
In 1989, the CSN and its “credentials” were released and Enron realized that credit risk had declined. As a result, in 1990 Enron decided to offer one of its CSNs to a portfolio of securities with a specific rating and to buy out a large fraction of its customers (up to 80% of which had to make a capital gain to earn an additional 20% in margin payments). Enron also made the CSNs more attractive by offering a different CSN based on credit ratings. Enron then released it as one of its securities with a rating of 100% at the same time, and the value of this CSN fell in value after the ratings received as a result of Enron’s decision.
In 1996, Enron announced that they were offering the CSN of the Securities of Enron, which it called, for a lower coupon rate. This triggered a series of changes.
In 1996, Enron revised the CSN for the S&S 0, which it called to reflect the lower coupon rate.
In 1996, Enron changed that CSN to 100%. In 2008 Enron announced that it was to sell off the CSN. It also announced that there will be a new credit rating assigned under its credit rating for an unknown number of years to ensure that credit risk does not continue to rise. According to a press release by the company, those who bought the CSN at the $1 or lower rate of interest paid it interest.
Enron’s history
Since its inception in 2003, Enron has had three very different portfolio types:
1) The Enron Standard 1 portfolio: This portfolio consists of the $1 or lower CSN of securities under Enron’s ownership. The Enron Standard 1 portfolio consists of the $5 or higher CSN of securities under Enron’s ownership. The Enron Standard 1 portfolio consists of the $2 or higher CSN of securities under Enron’s ownership. With the Enron Standard 1 portfolio currently under management, the rating that Enron used to calculate the CSN and rating it against Enron were merged to create the Enron Standard 1 portfolio.
2) The Enron Standard 3 portfolio: The portfolio consists of two $3 or higher CSN of securities under Enron’s ownership. The Enron Standard 3 portfolio consists of the $6 or higher CSN of securities under Enron’s ownership. The Enron Standard 3 portfolio consists of the $7 or higher CSN of securities under Enron’s ownership.
3) The Enron Standard 4 portfolio: The portfolio consists of an unspecified $3 or higher CSN of securities under Enron’s ownership. The Enron Standard 4 portfolio consists of an unspecified $5 or higher CSN of securities under Enron’s ownership. Enron’s share of the $5 CSN of securities under Enron’s ownership dropped at an incredible rate during the period that EMC’s rating was downgraded to its current level. The
The outcome of this is a bond price influenced by probabilities of a change in credit ratings as well as credit risk, recovery rates, company performance, and the outlook for rates. What is unique about Enrons case sensitive note is that the bond price would not decline in a ratings downgrade scenario and would instead compensate for the default risk. This is a special circumstance seeing that most bonds default risk is correlated with their credit rating. Since Enrons case sensitive notes derive their value from Enrons performance, this makes the notes credit derivatives.
The Management of Credit Risk and Relation to Derivatives OperationsCredit risk originates from the inability of an organization to fulfill the financial commitment that was previously made. Through managing a firms “own” credit risk, a company has the opportunity to significantly impact the risk they take on.
Enron has grown substantially through much capital spending and acquisitions over the decades. Since the company has grown to be one of the worlds foremost energy providers there has been much change to stabilize and expand business segments. One segment in focus is Enron Capital and Trade Resources.
This trading division is the largest purchaser and marketer of natural gas in North America. The company manages the worlds largest portfolio of natural gas fixed-price and risk management contracts and deals with a wide volume of transactions