We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is a Reference Asset?

Mary McMahon
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

A reference asset is the underlying subject of a credit derivative, a financial product based on performance of that asset. Credit derivatives are used by financial firms to control risk; in the event of a credit event like a default, they receive a payment to make good on the transaction. In an example, a company could hold a reference asset like bonds. If the issuer defaults and doesn’t pay out on them, the holder could receive a payment under a credit derivative contract.

Varying types of assets can be used as a reference in such contracts. They may be rated for reliability, which can determine the structure of the contract. The riskier the asset, the more the person holding it may want a credit derivative for protection. Conversely, prospective business partners may be concerned that there will be a high risk of having to pay out because the asset is likely to default.

Derivatives can be used both directly to hedge risk, and to trade in risk and credit. It is possible to sell and trade a derivative while the original holder retains the reference asset. People can make predictions about the asset’s performance and decide whether they want to buy or sell the contract. This creates a complex market that requires constant analysis and careful consideration from investors. If they fall behind on the performance of the reference asset, for example, they could find themselves holding unfavorable derivative contracts.

The original contract should clearly describe the reference asset and provide information about the company that holds it. This allows parties to the contract to assess the level of risk and determine how much the contract should be worth. Future buyers and traders can evaluate this information to determine whether a credit derivative is a sound buy or something that should be avoided. When bonds issued by a company that is about to go under are the underlying asset in a credit derivative, for instance, this information would be important to have.

Trade in credit derivatives allows for increased market activity, but can also create an extremely complex market; advanced traders like institutions and highly experienced individuals tend to be most involved in this type of trading. They have the resources to buy and research underlying assets, study contracts on the market, and make informed choices about purchases. New investors may not have these abilities and could run into trouble on the market.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Link to Sources
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGeek researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.