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DEFAULT SWAP Definition & Legal Meaning

Definition & Citations:

An OVERTHECOUNTER SWAP involving the exchange of deferred PREMIUM (often in the form of a floating rate CASH FLOW) for a lumpsum payment if an UNDERLYING reference credit DEFAULTS. The lumpsum payoff associated with the swap, which depends on the quoted price of the defaulted debt, is similar to that of a DEFAULT OPTION. See also CREDIT DERIVATIVE.

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