Credit Default Swaps (CDS)

A Credit Default Swap (CDS) is a financial contract that allows one party to protect itself against the risk of a borrower defaulting on a loan or bond. Think of it as insurance: the buyer of a CDS pays a fee to the seller, and in return, if the borrower fails to pay back their debt, the seller compensates the buyer for their loss. This tool helps manage credit risk, but it can also be complex, as it can be traded and used for speculation, contributing to financial market volatility.