A **Credit Default Swap (CDS)** is a financial derivative contract that functions as a form of insurance against the default of a borrower or issuer. The buyer of a CDS pays periodic premiums to the seller in exchange for protection against the risk of a credit event, such as a default or restructuring of debt, by a specific entity (reference entity).
### Key Features:
1. **Protection Buyer**: Pays regular premiums for protection.
2. **Protection Seller**: Provides the payout if a credit event occurs.
3. **Reference Entity**: The borrower or issuer whose debt is being insured.
CDS contracts are commonly used by investors to hedge risk or speculate on the creditworthiness of an entity. They played a significant role in the 2008 financial crisis due to their widespread use in high-risk markets.
No comments:
Post a Comment