Reference Entity

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.

BREAKING DOWN '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.

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RELATED FAQS
  1. What is the default risk of a derivative?

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    Find out when credit risk is realized as spread risk and when it is realized as default risk, and learn why market participants ... Read Answer >>
  3. Who is the counterparty of a derivative?

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  4. What are some examples of how corporations manage short-term investments?

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  5. What factors are taken into account to quantify credit risk?

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