A bond has positive convexity if the instrument's value increases at least as much as the duration predicts when rates drop, and decreases less than duration predicts when rates rise. Convexity for options is the sensitivity of an option's value to changes in the volatility of the underlying asset. The correlation between two variables is equal to the covariance between them divided by the standard deviation of each of the two variables. The cost of financial losses associated with the default of a contractual counterparty Covariance A measure of the degree to which the values of two variables move in tandem. A positive covariance indicates that the two variables move together, while a negative covariance means that they vary inversely.
Credit derivatives take many forms and include various kinds of swaps and options.
An event that triggers the settlement of a credit swap or a total return swap. Credit Exposure See Credit Risk. A credit spread option with a payoff that depends on the yield spread between a bond and another security which is usually a comparable maturity Treasury. Credit Reinsurance Reinsurance covering suppliers' financial losses due to non-collectable accounts when customers become insolvent. The risk of loss due to a counterparty being unable to fulfill its contractual obligations.