Credit Default Contract Law and Legal Definition

Credit default contract is a security with a risk level and pricing based on the risk of credit default by one or more underlying security issuers. The main goal of credit default contracts is to establish a price for a given default risk, where it can then be traded to another party who wishes to accept it. The biggest risk involved in credit default contracts is their extreme sensitivity to individual company and market fluctuations. If fear of default starts to creep into the credit default markets, spreads will rise across the board, making the cost of protection that much more expensive. Moreover, it will slow down activity in the debt markets as a whole. Credit default swaps (CDSs), credit default index contracts, credit default options are a few examples of credit default contracts.