This limits the credit exposure. Third , DEF might ask Flying Boats to put up a third-party guarantee. In this case, Flying Boats must find some other counterparty that will guarantee to pay DEF the difference between the market value of the contract before and after a negative Flying Boats credit event. This is insurance against the credit risk of the contract that Flying Boats must pay for. These are just some of the more simple examples of credit enhancement techniques.
Credit risk is a significant element of any derivatives transaction.
Because of the significance of credit risk, dealers must account for it when they conduct swaps transactions with their counterparties. This may mean that they charge a greater swap spread when pricing the swap curve for a particular counterparty or it may mean that they place greater conditions on the transaction.