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Unfunded Swap


A swap in which the investor (the long) pays an upfront amount (funding) in return for the total return of a reference asset.

For a credit swap (such as a CDS), being 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 swaps belong to the category of unfunded credit derivatives, which also includes credit spread options and credit default swaptions.



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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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