A basket default swap which sets a maximum payout for each defaulted reference entity, and whereby the payout is triggered once a specific loss threshold is reached. For example, if a senior basket default swap, consisting of five entities, sets the maximum payout for each entity at $5 million. Assuming that there will be no payout until the first $20 million of default losses (i.e., the threshold) is reached, and that the losses for the five entities (from the first to the fifth), in case of default, are in the tunes of 3, 5, 8,6, and 7 million US dollars, respectively. Then, the payout by the protection provider would follow the scheme set out below.

The losses for the first three defaults amount to $16 million. Only $5 million of the $8 million loss on the third entity will be applied to the $20 million threshold. As a result of the third default, $13 million (3+ 5+ 5) will be applied toward the threshold. If the fourth entity defaults, only $5 million is applied to the threshold. At this point, $36 million is applied to the threshold. When the fifth entity defaults, only $5 million will be applied because the maximum payout for each entity is $5 million. The first $2 million of the $5 million is, then, applied to cover the threshold. That brings the total payment by the protection seller to $20 million.