Can You Buy a CDS for a Debt Instrument That You Do Not Own?
Yes, it is possible and common to buy a CDS without owning the underlying debt instrument. This is known as purchasing a "naked" CDS.
This practice allows investors to speculate on the creditworthiness of a company or sovereign entity. For example, an investor who believes a company is likely to default can buy a CDS.
If a credit event occurs, the investor receives a payout despite not owning the underlying bond and therefore not suffering a direct loss from the default itself.
