The default payment in a credit derivative is triggered by the occurrence of a credit event. We saw earlier that a technical or actual default can be a credit event.
The following is a list of the different types of credit events that can be specified in a standard credit derivatives contract.
- If the credit rating of the reference entity falls below a specified level
- Payment default (Actual or technical)
- An increase in the credit spread paid by the reference entity
- If the obligor opts for debt restructuring
Any one or all of the above credit events can be specified in the credit derivatives contract.