What does Credit Derivative mean?
A derivative that transfers credit risk associated with an underlying entity. The risk is transferred from one party to another party without transfer of the underlying. The party transferring risk away pays a fee to the party that takes over the risk.
Futures Knowledge Explains Credit Derivative
Credit derivative serves as an insurance for a banker or investor who invest in bonds. For example, a bank can buy a credit derivative that transfers the risk of a borrower’s repayment default to other party, such credit guarantee institution and pays a fee. If the default occurs, the other party or institution compensate the bank.
Credit Default Contract, Credit Default Swap, Credit Default Swap Option, Credit Default Index Swap, Collateralized Debt Obligation and Asset Backed Credit Default Swap (ABCDS) are some of common versions of Credit Derivatives.