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Derivatives




Credit Contingent Swap


A credit derivative (specifically, a hybrid credit derivative) that entails the exchange (swapping) of two different legs of payment, one of which links a vanilla interest rate swap or currency swap to a credit event, such as a default on a credit-sensitive asset (e.g., a bond). This swap involves the transfer of credit risk associated with a specified reference entity (or a reference asset, or broadly a name) upon occurrence of a credit event and another trigger event.

The buyer (holder) has the right to sell a contractual obligation (bond, loan) for its face value, contingent on a pre-specified credit event and a trigger. In other words, in addition to the occurrence of a credit event, contingency requires an additional trigger, typically the occurrence of a credit event associated with another reference entity or a material change in asset prices (equity prices, commodity prices, or interest rates).



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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