Credit Default Contract
- Security with a risk level and pricing based on the risk of credit default by one or more underlying security issuers. Credit default contracts include credit default swaps (CDSs), credit default index contracts, credit default options and credit default basket options. Credit default contracts are also used as part of the mechanism behind many collateralized debt obligations (CDOs); in these cases, the contracts may have unique covenants that exclude company events, such as a debt restructuring as a "credit event".
The main goal of credit default contracts is to establish a price for a given default risk, where it can then be traded to another party who wishes to accept it. Growth of credit default contracts has exploded in recent years, as liquidity has grown along with institutional investor interest. They are a versatile tool for transferring risk away from a lender's balance sheet (such as in CDS) or for pure speculation by hedge funds and other investment vehicles.
The biggest risk in credit default contracts is their extreme sensitivity to individual company and market fluctuations. If fear of default starts to creep into the credit default markets, spreads will rise across the board, making the cost of protection that much more expensive, and slowing down activity in the debt markets as a whole.
Investment dictionary. Academic. 2012.
Look at other dictionaries:
credit default swap — A contract between a credit protection seller (seller) and a credit protection buyer (buyer) where, in consideration of the buyer paying the seller an agreed fee, the seller agrees to pay out agreed sums to the buyer if certain credit events… … Law dictionary
Credit default swap — If the reference bond performs without default, the protection buyer pays quarterly payments to the seller until maturity … Wikipedia
Credit Default Swap - CDS — A swap designed to transfer the credit exposure of fixed income products between parties. A credit default swap is also referred to as a credit derivative contract, where the purchaser of the swap makes payments up until the maturity date of a… … Investment dictionary
Credit default option — In finance, a default option, credit default swaption or credit default option is an option to buy protection (payer option) or sell protection (receiver option) as a credit default swap on a specific reference credit with a specific maturity.… … Wikipedia
credit default swap — noun A credit derivative contract between two counterparties, whereby the buyer (seller of risk) makes periodic payments to the seller (buyer of risk) in exchange for the right to a payoff if there is a default or other credit event in respect of … Wiktionary
Credit derivative — In finance, a credit derivative is a securitized derivative whose value is derived from the credit risk on an underlying bond, loan or any other financial asset. In this way, the credit risk is on an entity other than the counterparties to the… … Wikipedia
Credit risk — Categories of financial risk Credit risk Concentration risk Market risk Interest rate risk Currency risk Equity risk Commodity risk Liquidity risk Refinancing risk … Wikipedia
Contract for difference — In finance, a contract for difference (or CFD) is a contract between two parties, typically described as buyer and seller , stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at… … Wikipedia
Credit (finance) — Domestic credit to private sector in 2005 … Wikipedia
Credit-linked note — A credit linked note (CLN) is a form of funded credit derivative. It is structured as a security with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors. The issuer is not obligated to repay … Wikipedia