Quick Definition

A Credit Default Swap (CDS) is a financial derivative that allows an investor to swap or offset their credit risk with that of another investor.

Examples

• 1A bank buys a CDS to hedge against the risk of default on a loan it has issued to a corporation.
• 2An investment fund purchases a CDS to manage the risk associated with a potentially volatile bond portfolio.
• 3A company buys a CDS as insurance against the default of a debtor to ensure financial stability.
• 4An investor uses a CDS to speculate on the creditworthiness of a municipal bond, betting on its potential default.

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