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What is credit derivative (CD)?

The derivatives on credit risk (in English, credit derivatives) are financial derivatives whose underlying is made on the credit worthiness of a certain issuer ( a sovereign state, a government agency , financial institution , company ) as well as estimated by a rating agency.

CDswap

CDswap

These tools allow the issuer to manage credit risk (i.e., the possibility of a default by the debtor, no longer able to meet his payments) coupled to a particular asset (bond or loan) without being forced to pass it on. And also to separate the credit risk of an asset other types of risk (for example, interest rate risk, or the possibility that interest rates that they have in the market become disadvantageous to the lender).
Credit derivatives are traded on the (OTC market) and have very high minimum cuts, so are not suitable for retail investors. Among the credit derivatives, the most popular are especially credit default swaps that our readers already know. But there are total return swaps and credit linked notes.

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