Expert: Doug Ingram - 10/12/2007

Question
Hi
Could you please clarify if there is a difference between "Fixed Income Derivatives" and "Credit Derivatives", and if there is a difference, what is it?!

Answer
I use the terms interchangeably sometimes.  Whereas I think of all Credit Derivatives as Fixed Income Derivatives, the reverse is not always true. When you bring the term "credit" into the mix, you've added an extra element of risk that calls into question the ability of the hedge fund, pooler, or collateral to pay (perform).
You are thus depending on the creditworthiness of a third party whereas high quality agency pools of agency products wouldn't have that much of a concern.
In a Credit Derivative you are creating a product where a party is taking on the credit risk of an asset.  Credit default products like Credit Default Swaps are created to allow entities to hedge that part of the risk associated with an investment.
It's basically an insurance policy like a "Letter of Credit" on other types of investments.  Third parties take the risk of credit default as a fee (premium) or set up swaps with other large institutions.  
This comes into play more and more with leveraged hedge funds and CDO (Collateralized Debt Obligations)and was a big part of the financial crisis we just experienced.  The huge leveraging entered into by some funds called into question their ability to perform as valuations of collateral (like housing) were falling.