*Spoiler* Cross-Default and Jump-to-Default Provisions

Is anyone familiar enough with these to provide explanations? I came across them in a Schweser Exam and I don’t think I covered them.

cross default provision means that if the borrower defaults on one obligation, he immediately is in default on all of his other obligations. Jump to default is just another name for current credit risk. (hadn’t seen that before. but was in the answer.)

Lenders typically put cross-default provisions in loans in order to get to the negotiating table contemporaneously with other lenders, or if they are the sole lender, to call all the loans back at the same time.

“jump to default” has similar feel to “ad valorem” feel. big name for something really, really simple i thought cross-default meant something different than text. i thought it meant if one party defaults, then so does a related party… what they call cross-default seems like normal… if they miss bond payment but you don’t own bond, they’ve defaulted on everything… to me, that’s not cross-default. but i could easily be wrong, and at this time i’m happy to go with book. OK, did a little googling, and it looks like I’M WRONG. what else is new?

Found the Schweser reading on this. Reading #40 page 187 in book 4. “Credit risk has 2 time dimensions: current and future. As their names imply, current credit risk (also called jump-to-default risk) is associated with payments that are currently due, while potential credit risk is associated with payments due in the future.” “In measuring potential credit risk, creditors must consider not only their debts but also the debts owed by the debtor to other creditors. Because of cross-default-provisions in most lending agreements, a debtor is considered in default of all obligations if it defaults on any one of its obligations. In addition to potential credit risk associated with their own receipts, therefore, creditors are exposed to potential credit risk from a debtor defaulting on an obligation to another creditor.”

FWIW, i asked two good credit guys what “cross-default” meant and they came back with the “related companies”, say parent-subsidiary.

“current credit risk” looks more “postive and straightforward”. “jump-to-default risk” is made to confuse CFA L3 candidates. For the exam, they are exactly the same. :smiley:

Print it in my mind one more time…The debtors don’t like Cross-Default-Provision.

Cross default is good/protection for debtor or lender?

acer Wrote: ------------------------------------------------------- > Cross default is good/protection for debtor or > lender? Good protection for the lender.

jump to default simply means if the counterparty jumped to default this very moment what the loss will be and is obviously based on the exposure today, as opposed to potential exposure in the future at the time of default (EAD) which is much harder to know

sniper, is current credit risk also called jump-to-default risk? thanks.

deriv108 Wrote: ------------------------------------------------------- > sniper, is current credit risk also called > jump-to-default risk? thanks. Yes.