Credit Default Swap (CDS)

A Credit Default Swap (CDS) is a financial contract that acts like insurance against the risk of a borrower defaulting on a loan or debt. In a CDS, one party pays a fee to another party, known as the "protection seller," in exchange for compensation if the borrower fails to repay their debt. This allows investors to hedge against potential losses or speculate on creditworthiness. Essentially, it transfers the risk of default from one party to another, enabling financial institutions to manage their exposure to credit risk more effectively.