Credit Default Swap (CDS)

A credit default swap, or CDS, is a derivative which makes it possible to trade in the risk of borrowers defaulting on loans or bonds.

The difference between a credit default swap and loan default insurance coverage is that the swap buyer only receives compensation if borrowers do not default on their loan. That feature makes credit default swaps a useful instrument for trading in lending risk.

Credit default swaps are traded over the counter outside of stock exchanges. Typically, CDS terms of 3 to 10 years are offered.

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