Reference Asset

AAA

DEFINITION of 'Reference Asset'

An underlying asset used in credit derivatives, which are then used when there is a risky debt issuer, such as a corporation or municipality. In a credit derivative, the buyer purchases protection against the chance of default by the risky borrower by buying the reference asset.

INVESTOPEDIA EXPLAINS 'Reference Asset'

When an entity issues debt or borrows money, there is a chance that it will not repay the funds, which is called default risk. The debt holder is always exposed to risk by the borrower defaulting on the debt.

To hedge this risk, the debt holder can enter into a credit derivative, such as a total return or credit default swap. The swap allows the debt holder to transfer the risk they are exposed to to a third party.

RELATED TERMS
  1. Credit Default Swap - CDS

    A swap designed to transfer the credit exposure of fixed income ...
  2. Credit Derivative

    Privately held negotiable bilateral contracts that allow users ...
  3. Default

    1. The failure to promptly pay interest or principal when due. ...
  4. Default Risk

    The event in which companies or individuals will be unable to ...
  5. Underlying

    1. In derivatives, the security that must be delivered when a ...
  6. Total Return Swap

    A swap agreement in which one party makes payments based on a ...
Related Articles
  1. Credit Default Swaps: What Happens In ...
    Insurance

    Credit Default Swaps: What Happens In ...

  2. What Is A Corporate Credit Rating?
    Investing Basics

    What Is A Corporate Credit Rating?

  3. Are High-Yield Bonds Too Risky?
    Bonds & Fixed Income

    Are High-Yield Bonds Too Risky?

  4. Corporate Bonds: An Introduction To ...
    Bonds & Fixed Income

    Corporate Bonds: An Introduction To ...

comments powered by Disqus
Hot Definitions
  1. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific ...
  2. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  3. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  4. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
Trading Center