Which of the following best describes credit derivatives?

Credit derivatives are financial instruments that allow parties to manage and transfer credit risk. They include various types of contracts, among which credit default swaps (CDS) and collateralized debt obligations (CDOs) are the most notable. A credit default swap is a contract that provides insurance against the default of a borrower, allowing one party to transfer the credit risk of a reference entity to another party. Similarly, collateralized debt obligations are structured financial products that pool together assets, often consisting of various forms of debt, and are then divided into tranches that carry different levels of risk and return.

The selected option accurately captures the essence of credit derivatives by highlighting these contracts. The other choices do not appropriately define credit derivatives. For example, securities backed by real estate investments pertain more to mortgage-backed securities rather than credit derivatives. Options on equity stocks refer to derivative contracts derived from equity assets, which are not related to credit risk transfer. Lastly, securities created from futures contracts are not categorized as credit derivatives, as they typically involve commodity or financial futures rather than credit risk. Thus, option B encompasses the key characteristics and purposes of credit derivatives effectively.