Credit Default Swaps

Credit default swaps (CDS) are financial contracts that act like insurance against the risk of a borrower defaulting on debt. When someone buys a CDS, they pay a premium to another party in exchange for a promise to cover losses if the borrower fails to repay their loans. This provides protection to investors against defaults but can also lead to speculative trading. Essentially, a CDS allows investors to manage risk and bet on the creditworthiness of a borrower without owning the underlying debt.