Reference Asset


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.

BREAKING DOWN '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.

  1. Credit Default Swap - CDS

    A particular type of swap designed to transfer the credit exposure ...
  2. Default

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

    The event in which companies or individuals will be unable to ...
  4. Total Return Swap

    A swap agreement in which one party makes payments based on a ...
  5. Credit Derivative

    Privately held negotiable bilateral contracts that allow users ...
  6. Underlying

    1. In derivatives, the security that must be delivered when a ...
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