What does Credit Default Contract mean?
Credit default contract, a credit derivative, is a contract in which one party buys a protection against a credit risk by paying a periodic fee to another party. This is almost like an insurance and the protection seller makes payment if default occurs. This is also known as Credit default swap.
Futures Knowledge Explains Credit Default Contract
Credit default contract is traded and its price depends on risk profile of the underlying securities and their issuers, besides other factors. This instrument is used by the bankers and other lenders to transfer the credit risk to third party. However the speculators also deal with credit default contract and speculates on the potential for default of repayment to make money. Credit default swap (CDS), credit default index contract, credit default option are some common examples of credit default contracts.