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Credit Default Swaps in the Financing of SMEs in China

Author: XieChiMing
Tutor: RuanXiaoLi
School: Southwestern University of Finance and Economics
Course: Financial Engineering
Keywords: Credit default swaps SMEs Simplified model
CLC: F276.3;F224
Type: Master's thesis
Year: 2010
Downloads: 373
Quote: 0
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Abstract

Since 2000, China's economic development has entered a period of rapid development, however, since the second half of 2007, China's economy has suffered the impact of the U.S. subprime crisis, reduce the external demand, the increase in raw material costs. Under the dual pressures of the economic cycle adjustment as well as the international financial crisis, China's economy to maintain a stable, sustainable growth must be the adjustment of the industrial structure. As the adjustment of industrial structure, the most important part of small and medium enterprises, have far-reaching significance of an active market for the creation of employment opportunities, as well as to optimize the industrial structure adjustment. However, our single SME financing by SMEs themselves in asset size, market share, may be the value of the mortgage assets, the future development uncertainty baking characteristics, resulting in the financing of SMEs, as The economic development of the engine dropping out of the predicament of the credit markets. To solve this problem, this paper attempts to explore the introduction of Western developed countries are increasingly extensive application of credit default swap credit risk of this management tool, as a means to solve the dilemma of SME financing. The introduction part of this article first departure from the macroeconomic environment, the analysis of the role of SMEs in the economy as well as the difficulties faced by credit default swap idea used in the SME financing market. Review and previous work, which is divided into domestic and abroad, study abroad, mainly in the operation mechanism of the pricing model of credit default swaps, and domestic research even more emphasis on the financing of SMEs predicament. The body section of this article first study the problems that exist in the SME financing market. The study found the financing of SMEs for several reasons: 1. Banking market competition structure led to the SME financing efficiency and welfare obvious loss; small and medium-sized banks gradually become SME credit providers, but its slow development in small and medium-sized financing needs; 3. SMEs credit impact with the cooperation of small and medium-sized banks. So to solve the problem of financing of SMEs, it is necessary to introduce a more advanced credit management tools. Papers for credit default swaps, a detailed introduction to this section, including the principle of the introduction of credit default swaps, credit default swaps of elements, as well as review of the history and development of the credit default swaps and Reference. After the part in the article want to be able to fit the discussion of SME credit default swaps. First, the characteristics of SMEs in China, selected existing credit default swap pricing model. For credit derivatives pricing theory is divided into two, one called the structural model, this type of model is based on the Merton model basis through continuous relaxation model constraints development as a model, such a model the probability of default of the enterprises Asia endogenous variables considered, the more stringent definition of economics. While the other is called the simplified model, this model of corporate default probability as an exogenous variable embedded model, you can reference external data makes the application of the model to become more convenient. Found that the structure model involving an important variable is the volatility of the enterprise value, the actual process of SME financing, enterprise volatility will be difficult to obtain, because: 1. Country the SME financial data disorder, led to the adoption of the financial data to assess the value of the business will generate serious distortion. Relative presence of SMEs in the market, the time is not too long, to examine enterprise value volatility may be due to too little time, insufficient sample, making the solution error of the volatility and the actual gap. Relatively large enterprises, small and medium enterprises at a smaller scale, however, the rapid development stage enterprise value of future volatility may cause the price of credit default swaps in this way given out with the real situation to the volatility of the past to measure the development of different. So we can see from the above three points' rigorous economic implications of the structural model used in the financing of SMEs, however, may be because of the source of the data lead to pricing serious mistakes, the counterparty to the credit default to serious pricing risk, the paper argues that this kind of structural model for the pricing of credit default swaps does not apply to small and medium enterprises. Comparatively speaking, the application of credit derivatives pricing theory to another branch - the simplified model, the probability of default as exogenous variables, they are able to better adapt to the characteristics of the SME financing market. This paper mainly Duffie model ideas proposed pricing model for SME financing market in China. Model derived expressions can be seen by the following variables affect the price of credit default swaps, are: the duration of the contract, the contract with reference to the denomination of assets, reference asset default probability, recovery and default. In these four variables, the term of the contract, with reference to the assets denominations by direct response to the actual situation, the frame of reference of the probability of default and breach of recoveries exogenous variables in the model, the data need to be obtained from outside. Based on the above research, we learned to hope that the credit default swap market can effectively be applied in the SME financing market in China, more specifically explore. This paper the need for the establishment of SME rating mechanism, we can see from the above discussion about the model, the structural model used in SME financing market in China, there are some difficulties, and the application of a simplified model of credit default swap pricing if on SMEs probability of default and breach recovery data need to be obtained from the outside, these data obtained depends on the establishment and improvement of the rating mechanism for SMEs. Then again function and mode of operation of the suggestions raised the rating system established. The article also discusses the design, because as a typical credit derivative products, and not very mature management experience in China's financial markets, so a able to clarify the rights and obligations of the contract between buyers and sellers of credit on credit default swap contracts default swaps contracts should be standardized processing. In addition, the article also credit default swaps practical applications in several important needs of SME financing market point of note, the main points: 1. General meaning of the term from economics The risk-free rate is used in short-term Treasury bill rate. In the fixed-income market, however, be applied more widely swap rate, rather than the Treasury bill rate. However, our interest rate swaps to implement development soon, trading varieties are not very comprehensive, from the current point of view, it is in a dominant position in the inter-bank for seven repurchase (FR007) based products, credit default swaps carried out in our country, should be based on the seven-day repo rate as the risk-free rate as the basis for pricing. 2. Pricing model, we have neglected the expedition on market transaction costs as well as tax policy. Actual transactions, however, does not exist in a frictionless market, the development of standardized credit default swaps can not be divorced from the management of the government departments and constraints, taxes, fees should be reasonable in the pricing model comprehensive investigation in order to effectively and accurate pricing of credit default swap contracts. Choice about the method of settlement, in general, credit default swaps are mainly two billing methods, a cash settlement, a physical delivery. Using cash settlement usually requires a reasonable assessment of the occurrence of an event of default, the fair price of the reference asset. This requires that the market have the ability to effectively assess the ability of these reference asset, we discussed our SME market, however, is often difficult for these assets timely and effective assessment. One is that the financial position of SMEs in China are not very transparent, only the actual control of the enterprise to know about many of the specific internal information of the enterprise, the market can not be reflected. Second, SMEs are not as useful a recognized market prices like listed companies, so the price of the reference asset is difficult to be obtained by the market price, so the way of cash settlement is difficult to accurately reaction to the price of the reference asset So of early introduction of credit default swaps, as the main method of settlement should be based on the way of physical delivery. That part of the article from the credit risk, the risk management of credit default swaps trading risk, liquidity risk, pricing risk aspects are discussed. The last part of the article summarizes the favorable conditions and unfavorable factors apply to credit default swaps to SME financing market in China, the paper concludes that credit default swaps should be the introduction of advanced tools of SME financing market, However, the introduction of the need to adapt to the characteristics of the market, relevant departments should also be related to the system, as well as other aspects of the help provided for the actual situation. According to research ideas can be seen, the main innovation lies in the credit default swap this new credit management tool with the SME financing market in China two objects were combined to discuss. Explore the characteristics and nature of both the theory. Explore the issues that may arise when the two combine practical operation, and propose solutions to solve these problems. This thesis topics, which is intended to achieve.

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