Read more at www.simplecleareasy.com What is Credit default swap (CDS) ? A Credit Default Swap (CDS) is the most widely traded form of credit derivative. It is similar to an insurance contract or gaming type instrument, providing the buyer pays to buy protection from another party for losses that may occur as a result of the default, bankruptcy or credit rating downgrades. Example : The “buyer” of protection = Bank A The “seller” of protection = Insurance Company C Suppose Bank A buys corporate bonds issued by a Construction Company B. In order to hedge the default risk of B, Bank A buys a CDS from Insurance Company C. A pays a periodic fee to C, in exchange for a credit default protection. In return, C agrees to pay A a set amount if a credit default event occurs…
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