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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Credit Derivative, CDS, Synthetic CDO and First-to-default Baskets

Definition

A credit derivative is an instrument whose value depends on the creditworthiness of a particular organisation, asset or entity, as evidenced by a credit rating, by some event of default or by another measure of financial standing.

A CDS is a credit derivative in which one party makes payments to the other party in return for agreed compensation if there is a default (a credit event) relating to some third party.

A synthetic CDO is an asset whose value depends on the values of a pool of underlying CDSs.

A first-to-default basket is an asset whose value depends on the value of the weakest within a pool of underlying CDSs.

How are they used?

The value of traded financial ...

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