A credit derivative in which the investor, i.e., the credit protection seller, doesn’t make an upfront payment to the credit protection buyer when the latter buys the protection instrument. In effect, the protection seller stands ready to make the credit insurance payment on termination of the agreement, that is, upon occurrence of a specified credit event. Unfunded credit derivatives include credit default swaps (CDSs), credit spread options, credit default swaptions, etc.
April 26, 2024