In ‘binary’ or ‘digital’ credit default swaps, the recovery rate is fixed. For example, if two counterparties trade a $10 million credit default swap on IBM with a 40% fixed recovery rate, the protection seller will simply pay the protection buyer $6 million in the event of a default by IBM.

This approach has the advantage of simplicity, but the disadvantage that the protection buyer does know if it has bought enough protection to cover its losses. For this reason, binary credit derivatives are relatively rare.