Credit Derivatives

Derivative instruments created to separate the credit risk of a borrower from overall market risk. A purchaser of a bond might buy a credit derivative to cover the risk of the bond's debtor defaulting. Effectively the seller or writer of the credit derivative is providing an insurance policy against default. Credit derivatives can provide cover against a sudden widening of the bond's yield spread over benchmark government bonds, a deepening of its price discount, bankruptcy, insolvency or default.

See also: Derivatives, Toxic Assets, Collateralised Debt Obligation, Credit Default Swap, Synthetic CDO