Credit Default Swap - CDS
Definition of 'Credit Default Swap - CDS'A swap designed to transfer the credit exposure of fixed income products between parties. A credit default swap is also referred to as a credit derivative contract, where the purchaser of the swap makes payments up until the maturity date of a contract. Payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the loan. A CDS is considered insurance against non-payment. A buyer of a CDS might be speculating on the possibility that the third party will indeed default. |
|
Investopedia explains 'Credit Default Swap - CDS'The buyer of a credit default swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the debt security. In doing so, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. For example, the buyer of a credit default swap will be entitled to the par value of the contract by the seller of the swap, should the third party default on payments. By purchasing a swap, the buyer is transferring the risk that a debt security will default. |
|
Related Definitions
Articles Of Interest
-
A Guide To Real Estate Derivatives
These instruments provide exposure to the real estate market without having to buy and sell property. -
Credit Default Swaps: An Introduction
This derivative can help manage portfolio risk, but it isn't a simple vehicle. -
Credit Default Swaps
Discover what CDS are and how they can benefit companies and investors. -
An Introduction To Swaps
Learn how these derivatives work and how companies can benefit from them. -
Introduction To Counterparty Risk
Unlike a funded loan, the exposure from a credit derivative is complicated. Find out everything you need to know about counterparty risk. -
How Companies Use Derivatives To Hedge Risk
Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices. -
Credit Default Swaps: What Happens In A Credit Event?
The credit crisis of 2008 prompted important changes to the settlement of credit default swaps. -
How do companies benefit from interest rate and currency swaps?
An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular principal amount. However, in an interest rate swap, the principal amount ... -
Arbitrage Squeezes Profit From Market Inefficiency
This influential strategy capitalizes on the relationship between price and liquidity. -
The Cold, Hard Facts Behind Funding Your Retirement
Most people, depending on which side of retirement they’re on, feel they either won’t ever be able to retire or stay retired once they are. Many of us watched our parent’s generation put their ...
Free Annual Reports