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Credit Derivative

   Also found in: Acronyms, Wikipedia 0.01 sec.
Credit derivative
Financial instruments in which the payoffs depend on the credit risk of companies or government entities, other than the counterparties to the credit derivative transaction itself.

Credit Derivative
Any derivative that allows an investor to hedge its credit risk. For example, if a brokerage is concerned that a client may be unable to pay a margin call, it may transfer this risk to another investor in exchange for paying a fee. Regular derivatives, like forward contracts and options, may be used as credit derivatives, depending on the credit risk of an investor's other positions.

Credit Derivative

What Does Credit Derivative Mean?

Privately held negotiable bilateral contracts that enable their users to manage their exposure to credit risk. Credit derivatives are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of economic agents (private investors or governments).

Investopedia explains Credit Derivative

As an example, a bank concerned that one of its customers may not be able to repay a loan can protect itself against loss from default by transferring the credit risk to another party while keeping the loan on its books.

Related Terms:
Credit Default Swap
Credit Rating
Derivative
Securitization
Yield



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Risk management related credit derivative products such as Credit Default Swaps, albeit good hedges for risk, are truly double edged swords, if coupled with wanton speculation and overleveraging.
133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
that will buy up bad debt and cleanse financial institutions' balance sheets of the toxic credit derivative products they have been holding.
 
 
 
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