How Does a Credit Default Swap (CDS) Function as a Derivative? ▴ Learn

How Does a Credit Default Swap (CDS) Function as a Derivative?

A CDS is a financial derivative that acts like an insurance policy against the default of a debt issuer. The buyer of the CDS pays periodic premiums to the seller.

In return, the seller agrees to pay the buyer the face value of the debt if the issuer defaults. It is a contract that transfers the credit risk of a reference entity from the buyer to the seller.

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