Default Swap

A default swap is a financial contract where one party, the buyer, pays a regular fee to another party, the seller, in exchange for protection against the risk that a borrower or entity will fail to repay a loan or debt. If the borrower defaults, the seller compensates the buyer for the loss, effectively acting as insurance. This allows investors or institutions to manage and transfer credit risk, helping them reduce potential financial impact from defaults while providing the seller with a steady income from the premiums.