Posted in Finance, Accounting and Economics Terms, Total Reads: 541
Definition: Derivative Product Company
A special purpose fir that acts as a counter party to transactions of financial derivatives. The first derivative product company was, established in 2002.This is the company where the derivative product to be sold originates in. At times they also guarantee existing derivative products or act as a mediator between two parties in a transaction of derivative products. As they are majorly involved in credit derivates, at times they are known as “Credit Derivative Product Company” (CDPC).
These credit derivatives include credit default swaps etc. However at times these companies also transact in equity derivatives markets or currency markets or interest rate as well. These are companies that cater to other enterprises that wish to hedge risks of contract defaults, currency fluctuations etc.
The CDPC business is highly leveraged, such that even if a small portion of its credit default portfolio is triggered, the company will not have money to pay resulting claims. They are dependent on AAA ratings from credit rating agencies. In light of this, it came as a shock to all the 5 CDPCs that Fitch Ratings had rated when the rating agency withdrew its ratings citing uncertain business prospects as a reason.