Credit derivative

A Credit Derivative is like an insurance policy for loan payments. When you borrow money, the lender wants to make sure they get the money back. A Credit Derivative is a way to help the lender reduce their risk. It works like this: the lender pays a premium to an insurance company, and in exchange, the insurance company will help the lender if the borrower doesn't pay back the loan. The insurance company will either pay the lender back, or take over the loan and get the money back themselves. In this way, the lender is protected if the borrower doesn't pay back the loan.