Reference Entity

AAA

DEFINITION of 'Reference Entity'

One of the underlying parties involved in a credit derivative contract. The reference entity bears the credit risk of the contract, and can be a corporation, government or other legal entity that issues debt of any kind. If a credit event such as a default occurs and the reference entity is unable to satisfy the conditions of the bond, the buyer of the credit default swaps receives payment from the seller.

INVESTOPEDIA EXPLAINS 'Reference Entity'

The reference entity is essentially the party upon which the two counterparties in the transaction are speculating. The seller of the transaction is selling protection against the default of the reference entity. The buyer of the securitized credit derivative believes that there may be a chance that the reference entity will default upon their issued debt and is therefore entering the appropriate position.

RELATED TERMS
  1. Commodity

    1. A basic good used in commerce that is interchangeable with ...
  2. Commodity Swap

    A swap in which exchanged cash flows are dependent on the price ...
  3. Credit

    1. A contractual agreement in which a borrower receives something ...
  4. Credit Derivative

    Privately held negotiable bilateral contracts that allow users ...
  5. Futures Contract

    A contractual agreement, generally made on the trading floor ...
  6. Derivative

    A security whose price is dependent upon or derived from one ...
Related Articles
  1. Careers In The Derivatives Market
    Options & Futures

    Careers In The Derivatives Market

  2. The Barnyard Basics Of Derivatives
    Investing Basics

    The Barnyard Basics Of Derivatives

  3. The Alphabet Soup Of Credit Derivative ...
    Mutual Funds & ETFs

    The Alphabet Soup Of Credit Derivative ...

  4. Mark-To-Market Mayhem
    Options & Futures

    Mark-To-Market Mayhem

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center