Feasibility of valuing credit risk in the financial market in Sri Lanka: a case study

Abstract

The Sri Lankan financial market uses non analytical techniques to quantify credit risk. Credit derivatives are not used to transfer credit risk. A Credit Default Swap (CDS) is the most widely used credit derivative to manage credit risk. To evaluate the price of CDS, various sophisticated methods are used. This research paper focuses on techniques to hedge credit risk in the Sri Lankan financial market, the behaviours of CDS in derivative markets, calculating a fair value of CDS, the main advantages of using credit derivatives, and major imperfections to use the pricing process of CDS in the Sri Lankan market