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.
Glossar
Credit Risk
Exposure ⎊ Within cryptocurrency derivatives and options trading, exposure to credit risk arises from counterparty obligations, particularly when dealing with leveraged instruments or decentralized exchanges.
Credit Default Swap
Derivatives ⎊ A Credit Default Swap (CDS) within the cryptocurrency and options trading landscape represents a financial contract designed to transfer credit risk associated with a digital asset or a basket of assets.