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Credit Derivative / from <<http://www.investopedia.com/terms/c/creditderivative.asp>>
What does it Mean? "Credit Derivatives are privately held negotiable bilateral contracts
that allow 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 Says... "For example, a bank concerned that one of its customers
may not be able to repay a loan can protect itself against loss by transferring the
credit risk to another party while keeping the loan on its books. "
A Credit Derivitive is basically an insurance policy -- you buy a contract at a certain price
and are then protected for the life of the contract from whatever event is specified in the contract.
NOTE -- The fact that you can read the words above and understand each word -- does not mean you understand what derivatives are. These words do not mean the guy who wrote those words understands derivatives any better than you or I do. My personal opinion, based on Buddha's dictum (âBelieve nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense.â / Buddha.) is that this group of words are a hoax -- they mean nothing to me.