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Derivatives

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  • May 3, 2022
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Credit Risk Spread

In relation to credit default swaps (CDS) and other similar derivatives involving a deal of credit risk, it is the part of risk premium attributable to credit risk (default risk by the issuer of underlying debt). This spread corresponds to the premium that compensates for the risk associated with the issuer’s ability to service the debt.The credit risk spread is the part of risk premium that compensates for the riskiness of an issuer. That type of risk is the main determinant of credit risk spreads in credit default swaps and other similar instruments.

A credit default swap entails the transfer of credit risk from the protection buyer to the protection seller, and the price of this protection, known as the credit risk spread or CDS spread, is the price of the credit risk. The riskier (i.e. low rating) the issuer or the reference entity, the higher the risk spread that the protection buyer has to pay.


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