A swap agreement in which a contingent payment on one leg is linked to a trigger event, such as a natural occurrence (earthquake, hurricane, flood, any other weather-related phenomena, or statistics related to such events, etc.) or a gaming or sport outcome. The occurrence of a trigger event will make a party lose some or all of the amount invested in the swap. For example, if a trigger event occurs, the a party may lose the notional amount of the swap.
Event-linked swaps are similar to event-link bonds (catastrophe bonds). If a trigger event occurs, an investor may lose a portion or its entire principal invested in an event-linked bond or notional amount on an event-linked swap. However, event-linked swaps are typically exposed to risks in addition to the risks associated with event-linked bonds, including counterparty risk and leverage risk.
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