Credit Derivatives

Credit derivatives are financial contracts that allow one party to manage the risk of default on a loan or bond. Essentially, they act as insurance against the possibility that a borrower won't pay back their debt. The most common type is a credit default swap (CDS), where one party pays a premium to another in exchange for compensation if the borrower defaults. This helps investors protect themselves from potential losses and can also be used for speculation on changes in credit quality. Overall, credit derivatives are tools for managing credit risk in financial markets.