"This site is the web's most comprehensive resource on credit derivatives.
Credit derivatives are derivative instruments that seek to trade in credit risks. All derivatives have some common features: they are related to some risk or volatility, typically do not require initial investment, and may be net settled. For example, the risk or volatility in an inter-rate swap is movements in interest rates. In a commodity derivative, it is commodity prices. Likewise, the subject matter of a credit derivative is the general credit risk of a reference entity. The general credit risk is indicated by the happening of certain events, called credit events, which include bankruptcy, failure to pay, restructuring etc.
There is a party trying to transfer credit risk, called protection buyer, and the counterparty is trying to acquire credit risk, called protection seller.
The primary purpose of credit derivatives must have been to hedge - a bank having exposure in a reference entity seeks to protect itself by buying protection from another. But over time, credit derivatives market has become a trading market. Trades in credit derivatives are taken to be proxies for trades in actual loans or bonds of the reference entity. For example, a bank willing to acquire exposure in a reference entity X would sell protection referenced to X; while a bank holding a bearish view on X will buy protection. Therefore, credit derivatives trades have become easy tools to replicate a funded cash bond or cash loan of a reference entity, minus all the inflexibilities, lack of availability or regulatory and ..."
Via Stefano KaliFire