What is a credit event?
The term 'credit event' is used in two different but related ways. In the general sense, it refers to any event that affects the credibility of entity. Credit events occur suddenly and cause a decline in credit rating someone. A classic example is bankruptcy that will lead to a reduction in the fight for it. In the narrower sense, it concerns an event that provokes a loan agreement, which will pay the buyer to the seller. Some examples include debt failure, bankruptcy statement, or breach of the loan agreement. If the credit event is reported to the credit office or a rating agency, there will be downgrading. The amount of downgrade varies depending on the standards specified by the evaluator and the nature of the credit event. For example, something like a late payment is rated less than a mortgage.
In the world of loan, derisms about the lubricants, financial institutions extend the risk by selling contracts on the basis of the debt it holds. Buyer contracts will take over the risk, which meansthat if the debtor does not pay, the seller may require the buyer from the buyer. In this case, the credit event is something that causes the seller to consider a payable contract for a loan derivative, in which case the buyer is expected to pay.
Bankruptcy is an example of a credit event of this nature. Also an example is a rejection or moratorium in which the contract is questioned. Unable and default obligations are other examples. The loan derivative agreement may also be due due to the acceleration of obligations if the debt is due before it originally agreed as a result of a breach of the credit agreement. Once the credit event occurs and is documented, the seller may require a payment from the buyer.
Credit derivatives can be a risky trade. In general, such financial products are sold in packages organized by credit risk, which allows the buyer to select and select the naturea debt that would like to take over the risk. Buyers accept high -risk tools to understand that they can be forced to pay for them. If a credit event occurs, the buyer must be prepared to repay the loan derivative, and if more events appear at the same time, this may be a problem for the buyer.