Reference Obligation

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DEFINITION of 'Reference Obligation'

The specific underlying debt upon which a credit derivative is based. A reference obligation is issued by the reference entity. It does not represent all the forms of debt issued by the entity, but only a specific issue. Often, this obligation is the actual security that the credit derivative was created to hedge.

INVESTOPEDIA EXPLAINS 'Reference Obligation'

The reference obligation is the specific issue of a debt security upon which the two parties in the credit derivative transaction are betting against each other. If the reference entity defaults on this issue (or another specific, agreed-upon event occurs), the buyer receives a payout. If no triggering event occurs to the reference obligation, the seller of the credit derivative profits from the premium paid by the buyer.

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