In any event, when it comes down to pay that large sum, the actual value will not match notional value. Contracts are not money,
... Legally enforceable netting agreements allowed banks to reduce the gross credit exposure of $2.8 trillion by 84.3% to $435 billion in net current credit exposure. ... The second step in evaluating credit risk involves an estimation of how much the value of a given derivative contract might change in the bank's favor over the remaining life of the contract; this is referred to as the "potential future exposure" (PFE). PFE increased 6% in the third quarter to $884 billion. The total credit exposure (PFE plus the net current credit exposure) increased from $1.2 trillion in the second quarter of 2008 to $1.3 trillion in the third quarter.
The second step in evaluating credit risk involves an estimation of how much the value of a given derivative contract might change in the bank's favor over the remaining life of the contract; this is referred to as the "potential future exposure" (PFE). PFE increased 6% in the third quarter to $884 billion. The total credit exposure (PFE plus the net current credit exposure) increased from $1.2 trillion in the second quarter of 2008 to $1.3 trillion in the third quarter.
This is the "credit exposure" for all the derivatives, not just "credit derivatives".
It's interesting that you can have $16 trillion (notional) of outstanding CDS for a credit exposure of less than $4 trillion. Does that mean the credit risk is "insured" at least 4-fold, maybe more than 10-fold?
rootless2:
Contracts are not money
