Publisher Summary Credit derivatives allow investors to manage the credit risk exposure of their portfolios or asset holdings, essentially by offering insurance against deterioration in credit quality of the borrowing entity. Credit risk is the risk that a borrowing entity will default on a loan, either through inability to maintain the interest servicing or because of bankruptcy or insolvency leading to inability to repay the principal itself. Credit derivatives are financial contracts designed to reduce or eliminate credit risk exposure by offering insurance against losses suffered due to credit events. The use of credit derivatives assists banks with restructuring their businesses, because they allow banks to repackage and parcel out credit risk, while retaining assets on-balance sheet and thus maintain client relationships. A bank can reduce credit exposure either for an individual loan or a sectoral concentration, by buying a credit default swap. The occurrence of a specified credit event will trigger payment of the default payment by the seller of protection to the buyer of protection.