hedging counterparty risk with credit derivatives

Marco.Musci said:

Hi all,

I have some doubt regarding this part in Gregory, chapter 4:

"Hedging: Hedging counterparty risk with instruments such as credit default swaps (CDSs) aims to protect against potential default events and adverse credit spread movements.
o Hedging creates operational risk and additional market risk through the mark-to-market (MTM) volatility of the hedging instruments. Taking certain types of collateral can create wrong-way risk. Hedging may lead to systemic risk through feedback effects."

I would like to ask:

1) how can we use credit derivatives to hedge counterparty risk, considered that the exposure will fluctuate through time?
2) what are the feedback effects?

Thank you in advance,
Marco.

Click to expand...

• https://forum.bionicturtle.com/threads/how-to-hedge-total-return-swap-using-cds.5946/
• https://forum.bionicturtle.com/threads/p2-t6-407-credit-exposure-gregory.7704/
• https://forum.bionicturtle.com/threads/cds-bond-basis-factors-confusing-impact.10284/
• https://forum.bionicturtle.com/thre...al-return-swaps-topic-review.6217/#post-35586