Credit Default Swap (CDS)
A credit default swap (CDS) is a financial derivative or contract that allows an investor to “swap” or offset the credit risk of a loan or debt instrument. It is a type of insurance policy that provides protection against the risk of default on a loan or debt instrument. In the event of a default, the CDS pays out a predetermined amount to the investor. CDSs are used by investors to hedge against the risk of default on a loan or debt instrument, and can also be used to speculate on the creditworthiness of a loan or debt instrument.
History of Credit Default Swaps
Credit default swaps were first introduced in the late 1990s as a way to transfer credit risk from one party to another. They were initially used by banks and other financial institutions to hedge against the risk of default on loans and other debt instruments. Over time, CDSs have become increasingly popular as a way to speculate on the creditworthiness of a loan or debt instrument. Today, CDSs are used by a wide range of investors, including hedge funds, banks, and other financial institutions.
Comparison Table
Type of Risk | CDS | Insurance |
---|---|---|
Cost | Low | High |
Risk Transfer | Yes | Yes |
Flexibility | High | Low |
Summary
Credit default swaps are a type of financial derivative or contract that allows an investor to offset the credit risk of a loan or debt instrument. They are used by investors to hedge against the risk of default on a loan or debt instrument, and can also be used to speculate on the creditworthiness of a loan or debt instrument. CDSs are typically less expensive than insurance policies, and offer more flexibility in terms of risk transfer. For more information about credit default swaps, please visit the websites of the International Swaps and Derivatives Association (ISDA) and the Securities and Exchange Commission (SEC).
See Also
- Interest Rate Swap
- Currency Swap
- Total Return Swap
- Equity Swap
- Credit Spread
- Collateralized Debt Obligation
- Credit Linked Note
- Credit Derivative
- Credit Risk Transfer
- Credit Default Option