Credit Default Swaps (CDS)
A Credit Default Swap (CDS) is a financial instrument that provides protection against the risk of default on a debt obligation. It is a type of insurance contract between two parties, the buyer and the seller, where the buyer pays a fee to the seller in exchange for protection against the risk of default. The buyer is typically an investor or a lender, while the seller is typically an insurance company or a bank. The buyer pays a premium to the seller in exchange for the protection against the risk of default.
The CDS is a form of credit derivative, which is a financial instrument that derives its value from the performance of an underlying asset. In the case of a CDS, the underlying asset is a debt obligation, such as a bond or loan. The CDS is used to transfer the risk of default from the buyer to the seller. If the underlying debt obligation defaults, the seller is obligated to pay the buyer the amount of the default.
History of Credit Default Swaps
Credit Default Swaps were first introduced in the late 1990s as a way to transfer the risk of default from one party to another. They were initially used by banks and other financial institutions to hedge against the risk of default on their loan portfolios. Over time, they have become increasingly popular as a way to transfer the risk of default from one party to another, and they are now used by a wide range of investors and lenders.
The CDS market has grown significantly since its introduction, and it is now one of the largest and most liquid markets in the world. According to the International Swaps and Derivatives Association, the global CDS market was estimated to be worth $26.3 trillion in 2020.
Comparison Table
| Type of Instrument | Risk of Default | Premium |
|---|---|---|
| Credit Default Swap | Transferred to Seller | Paid by Buyer |
| Bond | Retained by Buyer | Paid by Issuer |
Summary
Credit Default Swaps are financial instruments that provide protection against the risk of default on a debt obligation. They are used by a wide range of investors and lenders to transfer the risk of default from one party to another. The CDS market has grown significantly since its introduction, and it is now one of the largest and most liquid markets in the world. For more information about Credit Default Swaps, please visit the websites of the International Swaps and Derivatives Association or the US Securities and Exchange Commission.
See Also
- Credit Derivatives
- Interest Rate Swaps
- Currency Swaps
- Equity Swaps
- Total Return Swaps
- Collateralized Debt Obligations
- Credit Linked Notes
- Synthetic Collateralized Debt Obligations
- Credit Risk Transfer
- Credit Default Swap Index
