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How Do Credit Default Swaps (CDS) Relate to Counterparty Risk?

A CDS is a derivative that transfers the credit risk (a form of counterparty risk) of a debt issuer from the buyer to the seller.
Greeks.Live22.11.25

How Do Credit Default Swaps (CDS) Relate to Counterparty Risk?

A Credit Default Swap (CDS) is a financial derivative used to transfer credit risk, which is a form of counterparty risk, from one party to another. The buyer of a CDS pays a premium to the seller in exchange for the right to receive a payout if a specified "reference entity" defaults on its debt.

The CDS essentially acts as an insurance policy against the counterparty risk of a bond issuer, allowing investors to hedge or speculate on credit events.

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