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Derivatives

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  • January 29, 2022
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Credit Forward Contract

A credit derivative which constitutes a forward contract on a credit spread. More specifically, it is a single-period OTC contract whose payoff is based on the difference between an agreed credit spread (or price) and the terminal credit spread (price) of a credit-risky debt reference. This contract provides a hedge against an increase in default risk on a debt issue (i.e., the decline in credit quality of an issuer) after the interest rate is set and the debt has been issued.


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