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Credit Default Swaps - What is a credit event payment?

Fixed Amount (digital)

An amount to be paid in the case of a credit event is fixed at the outset.

Used in recovery rate swaps

Physical Delivery

The protection buyer delivers obligations of the reference entity from an agreed basket with face value of the notional of the trade: the protection seller pays par

Cash Settled

Default value is determined by a dealer poll and the protection seller pays the difference between par and the default value on the notional amount of the trade to the protection buyer

Auction

The are often more CDS outstanding than debt obligations of the reference entity

To preclude vast artificial turnover, an auction process has been established to determine the default value, which is then applied across the market.

The terms are too complex to discuss here, but see Markit/Creditex Credit Event Auction Primer

Credit Derivative Instruments

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