CDS (Credit Default Swaps)

A Credit Default Swap (CDS) is a financial contract used to transfer the risk of credit default from one party to another. Essentially, it's like insurance: one party pays a regular fee to another party, who agrees to compensate them if a specific borrower (like a company or government) fails to repay their debt. Investors use CDS to protect against losses from defaults or to speculate on the creditworthiness of borrowers. While they can help manage risk, CDS also played a significant role in the 2008 financial crisis, highlighting their complexity and potential for systemic risk.