Conversely, if the loan’s credit quality improves, the value of the credit derivative declines, resulting in a reported loss. These gains and losses may be offset by the level of provisions that are established for estimated credit losses on the loan, but this would likely result in only a partial offset.
BIS Review 69/2004  3  As management attempts to reduce this earnings volatility, we may see changes in risk-management practices. Unfortunately, some managers might use fewer credit derivatives to reduce credit risk due to this potential earnings volatility.