credit default swap

A credit default swap (CDS) is a financial contract between two parties, where one party pays a fee to another in exchange for protection against the risk of a borrower defaulting on their debt. Essentially, if the borrower fails to make payments, the seller of the CDS compensates the buyer for their losses. It functions like insurance for debt investments, allowing investors to manage credit risk. While they can provide security, CDSs also add complexity to financial markets and can contribute to systemic risks if mismanaged.