Basics of Credit Derivatives

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Credit derivatives terminology

By Vinod Kothari

 

 

Binary payout structure A payout structure in a credit derivative contract where the protection seller will pay to the protection buyer a fixed amount in case the credit event takes place. Also called digital default swap. Compare with recovery value payout – which is the usual method of settlement of a default swap. However, binary swaps allow the parties to leverage (deleverage) the risk of the protection seller by fixing a particular amount as a pre-agreed estimate of the losses upon credit event.

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