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Cash settlement
A payout following a credit event in which the protection seller pays the protection buyer an amount calculated as equivalent to the par value of a deliverable obligation less a recovery rate.This amount is determined by the calculation agent, usually by a dealer poll of the price of an obligation. The calculation agent is usually one of the two counterparties to the trade.
Among the different types of credit derivative, cash settlement is most often found in the documentation for synthetic CDOs. However, counterparties to a physically settled credit derivative may agree to cash-settle, and this has been common for since 2005.
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