Basics of Credit Derivatives

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Credit derivatives terminology

By Vinod Kothari

     

Basis Risk: Generically means the risk that the basic rate or risk in one contract may not perfectly match up or hedge the rate or risk of another. In the context of credit derivatives, if a protection buyer does not get a good hedge against a reference obligation because the terms of the protection, that is, credit events do not properly mirror the risk in the underlying asset, then the protection buyer has a basis risk.

 

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