Business and Personal Finance Dictionary

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• CREDIT SWAP
  
  Definition: A Swap whose value depends on underlying credit quality, preferably without bearing ordinary interest-rate risk. Examples: A Total Return Swap (q.v.) with underlying risky debt might qualify, although this has a heavy dose of interest rate risk. An Outperformance Swap, with a payoff proportional to the excess of the rate of return on the risky debt over the rate of return on a comparable Treasury bond, would be a clearer example. A Total Return Swap plus an ordinary Interest Rate Swap () that offsets the interest rate risk. The exchange of a constant fee per period versus a binary floating payment of either zero or a Credit Event Payment. A Credit Spread Swap. Application: See Credit Derivatives for applications. Pricing and Risk management: See the specific type of Credit Swap. Comment: Pricing and hedging might be difficult, and market manipulation may be an issue for a thinly traded underlying instrument.
  
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