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.

RELATED TERMS
  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Commodity Swap

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

    1. A basic good used in commerce that is interchangeable with ...
  4. Credit

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

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

    A contractual agreement, generally made on the trading floor ...
Related Articles
  1. Options & Futures

    Careers In The Derivatives Market

    The growing interest in and complexity of these securities means opportunities for job seekers.
  2. Investing Basics

    The Barnyard Basics Of Derivatives

    This tale of a fictional chicken farm is a great way to learn how derivatives work in the market.
  3. Mutual Funds & ETFs

    The Alphabet Soup Of Credit Derivative Indexes

    Find out how these instruments work and how they are used in the market.
  4. Options & Futures

    Mark-To-Market Mayhem

    Did this accounting convention contribute to the credit crisis of 2008? Find out here.
  5. Investing Basics

    How You Make Money In Real Estate

    No matter what anyone tells you, the basic ways that money is made through real estate haven’t changed in centuries.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Mutual Funds & ETFs

    5 Vanguard Fixed Income Fund Underperformers

    Learn about three Vanguard fixed income mutual funds that underperform compared to their benchmark indexes. Find out why low expense ratios are important.
  8. Mutual Funds & ETFs

    Top 3 Allianz Funds for Retirement Diversification in 2016

    Discover the top three Allianz funds for retirement diversification in 2016, with a summary of the portfolio's managers, performance and risk measures.
  9. Mutual Funds & ETFs

    3 PIMCO Funds Rated 5 Stars by Morningstar

    Learn about three fixed income mutual funds managed by Pacific Investment Management Company (PIMCO) that have received five-star overall ratings from Morningstar.
  10. Investing Basics

    10 Habits Of Successful Real Estate Investors

    Enjoying long-term success in real estate investing requires certain habits. Here are 10 that effective real estate investors share.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  3. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  4. What are the maximum Social Security disability benefits?

    The average Social Security disability benefit amount for a recipient of Social Security Disability Insurance (SSDI) in 2 ... Read Full Answer >>
  5. How do I calculate the future value of an annuity?

    When planning for retirement, it is important to have a good idea of how much income you can rely on each year. There are ... Read Full Answer >>
  6. Have hedge funds eroded market opportunities?

    Hedge funds have not eroded market opportunities for longer-term investors. Many investors incorrectly assume they cannot ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center