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Credit derivative instrument
A derivative designed to allow one party to separate credit risk from the other risk components of a reference asset or pool of reference assets, which it may or may not own, most often one or more receivables or a security that represents one or more receivables, and to hedge against credit risk by transferring it to one or more counterparties in exchange for a premium or interest-related payments without giving up ownership of the asset or pool of reference assets.
(1) The credit risk associated with a credit derivative may be defined with regards to a specific credit event relating to a reference asset (or pool of reference assets), the total return on such asset, or the credit spread between this asset and a market rate or the rate of another asset. The credit risk depends somewhat on the credit quality of the underlying receivables and other reference assets, and on the solvency of the reference entity or its creditworthiness as evidenced, for example, by the rating attributed to it by a recognized credit rating agency.
(2) Credit derivatives may take various forms. For example, they include credit spread derivatives, such as the credit spread forward, the credit futures and the credit spread option, as well as credit swaps such as the credit default swap and the total return swap.
Translations
Synonyms and variations
- Credit derivative
- Credit derivative contract
- Credit derivative product
- Credit spread derivatives
- Reference entity
See also
- Credit default swap
- Credit event
- Credit futures
- Credit risk
- Credit spread 1.
- Credit spread forward
- Credit spread option
- Credit swap
- Credit-linked note
- Credit-sensitive note
- Derivative
- Funded credit derivative
- Multi-name
- Protection buyer
- Protection seller
- Reference asset
- Single-name
- Total return swap
- Unfunded credit derivative