Credit Default Swap
A financial derivative that transfers the credit risk of a reference entity from one party to another.
Also: CDS
Definition
A credit default swap (CDS) is a financial derivative contract in which one party (the protection buyer) makes periodic payments to another party (the protection seller) in exchange for a payoff if a specified credit event occurs ”” typically a default, restructuring, or bankruptcy of a reference entity (bond or loan issuer). CDS function like insurance against credit risk. CDSs played a central role in the 2008 financial crisis, as they were widely used to speculate on ”” and amplify exposure to ”” mortgage defaults.
Example
“An investor holding corporate bonds buys CDS contracts on the bonds; if the company defaults, the CDS seller compensates the investor for the loss in bond value.”
Usage Examples
- 1
“The team applied credit default swap best practices to improve their banking outcomes significantly.”
- 2
“Understanding credit default swap is essential for anyone building a career in Finance.”
When & How to Use
Use 'Credit Default Swap' when working in Banking contexts where a credit default swap (cds) is a financial derivative contract in which one party (the protection buyer) makes periodic payments to another party (the protection seller) in exchange for a payoff if a specified credit event occurs ”” typically a default, restructuring, or bankruptcy of a reference entity (bond or loan issuer).
- ▸Applying credit default swap principles during a banking project or initiative
- ▸Explaining credit default swap to a junior team member or stakeholder unfamiliar with Finance
- ▸Evaluating options or proposals using credit default swap as a decision-making criterion
Etymology & Origin
The term 'Credit Default Swap' derives from Latin roots and entered Finance professional usage as the field formalised in the 20th century.
History & Evolution
The concept of credit default swap has evolved alongside Finance. Early practitioners relied on informal methods; structured approaches emerged with the professionalisation of banking in the mid-20th century. Today, credit default swap is a standard part of Finance practice globally.
Synonyms
- credit protection
- default insurance
- credit derivative
Images
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Related Terms
- derivative
- credit-risk
- hedging
- default