In the context of a CDS, what is meant by 'trigger events'?

In the context of a Credit Default Swap (CDS), 'trigger events' refer to the specific occurrences that activate the terms of the contract. These events typically include defaults on the underlying debt obligation, such as bankruptcy, failure to pay principal or interest, or debt restructuring. When one of these trigger events occurs, the protection buyer can invoke the CDS to receive compensation from the protection seller.

This understanding is crucial because the trigger events define the circumstances under which the CDS will come into effect and provide protection against credit risk. Knowing these events helps investors and institutions assess their risk exposure and the associated protections when dealing with credit derivatives.

Other options pertain to different aspects of a CDS or do not accurately reflect the function of trigger events. For instance, the promise of asset delivery refers to obligations in other forms of contracts, while price fluctuations may impact market dynamics and valuations but do not initiate a CDS payout. The validity periods of a CDS contract are also important, but they are distinct elements separate from the triggering mechanisms of the contract.