Credit event
Definition · Level 12 · Exotics & structured
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The trigger that makes a credit default swap pay: bankruptcy, failure to pay, and in some contracts a restructuring of the debt.
Example
A carmaker misses a bond payment → protection sellers must pay.
Where Tradecraft teaches it
Level 12 · Exotics & structured, in the lesson “Credit default swaps & total return swaps”: Insurance on a borrower, the spread as default odds, and ownership through a swap.
Related terms
- CDS index (CDX, iTraxx)A standard basket of credit default swaps (CDS) traded as one contract.
- Credit default swapInsurance on a borrower: the buyer pays a running spread in basis points (bp) a year; on a credit event the seller pays notional × (1 − recovery).
- Hazard rateAnnual risk-neutral default probability implied by credit spreads: about the spread ÷ (1 − recovery).
- Recovery rateShare of face value that creditors get back after a default.
- Total return swapOne side receives all of an asset’s returns (income and price change) and pays a funding rate plus a spread: synthetic, leveraged ownership.
- Asian optionAverage-price option: its payoff uses the average of the price on a set of dates, so it is less volatile and cheaper than the vanilla.