Credit Default Swaps are a type of derivative contract that allows one investor to swap or transfer his credit risk to another.
If a lender is concerned that a borrower may default on a loan, for example, he might offset or transfer the risk.
To hedge against default, the lender purchases a credit default swap (CDS) from another investor who offers to compensate the lender if the borrower defaults. The majority of CDS contracts are maintained by a recurring premium payment, similar to how an insurance policy’s regular payments are paid.
This risk can be transferred to a company, country, or any other entity.
During the European sovereign debt crisis, credit default swaps were widely used.
Greece’s government bonds had a 94 percent default chance in September 2011. CDS were widely employed by hedge funds to bet on the prospect of the possibility that the country would default.
Post Disclaimer
Information provided on this website is for Educational & Informational purposes only and is not considered to be advice or recommendation of any kind whatsoever. Anyone who wishes to apply the concept & ideas contained in this shall take full responsibility. Readers should always do their own diligence on any information perceived from this site to form their own opinion and best judgments. Any action you take upon the information you find on this website (letsthinkwise.com), is strictly at your own risk.