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Investopedia explains 'Credit Default Contract'
The main goal of credit default contracts is to establish a price for a given default risk, where it can then be traded to another party who wishes to accept it. Growth of credit default contracts has exploded in recent years, as liquidity has grown along with institutional investor interest. They are a versatile tool for transferring risk away from a lender's balance sheet (such as in CDS) or for pure speculation by hedge funds and other investment vehicles.
The biggest risk in credit default contracts is their extreme sensitivity to individual company and market fluctuations. If fear of default starts to creep into the credit default markets, spreads will rise across the board, making the cost of protection that much more expensive, and slowing down activity in the debt markets as a whole.
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