Credit Risk is used to transfer the risk from one party to another in case if a credit event. Let us say that Party A gives loan to party B (reference party). Party A, to secure itself against a default from party B takes insurance from another Paty C.
The most commonly used credit derivative is the 'credit derivate swap' where the credit risk is swapped between 2 parties. Party A makes regular payment (premium) to party C but party C makes no payment unless there is a credit event. In case B is not able to repay the loan, partt C makes payment to A and then the swap terminates. The amount of payment made is generally the decline in the market value of the reference asset.
