Types
Credit derivatives are fundamentally divided into two categories: funded credit derivatives and unfunded credit derivatives.
An unfunded credit derivative is a bilateral contract between two counterparties, where each party is responsible for making its payments under the contract (i.e. payments of premiums and any cash or physical settlement amount) itself without recourse to other assets.
A funded credit derivative involves the protection seller (the party that assumes the credit risk) making an initial payment that is used to settle any potential credit events. (The protection buyer, however, still may be exposed to the credit risk of the protection seller itself. This is known as counterparty risk.)
Unfunded credit derivative products include the following products:
- Credit default swap (CDS)
- Total return swap
- Constant maturity credit default swap (CMCDS)
- First to Default Credit Default Swap
- Portfolio Credit Default Swap
- Secured Loan Credit Default Swap
- Credit Default Swap on Asset Backed Securities
- Credit default swaption
- Recovery lock transaction
- Credit Spread Option
- CDS index products
Funded credit derivative products include the following products:
- Credit linked note (CLN)
- Synthetic Collateralised Debt Obligation (CDO)
- Constant Proportion Debt Obligation (CPDO)
- Synthetic Constant Proportion Portfolio Insurance (Synthetic CPPI)
Read more about this topic: Credit Derivative
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