How Does a ‘Credit Default Swap’ (CDS) Work?
A Credit Default Swap (CDS) is a derivative contract where the buyer makes periodic payments (like insurance premiums) to the seller. In return, the seller agrees to pay the buyer a lump sum if a specified credit event (like a default or bankruptcy) occurs to a reference entity (e.g. a corporation or sovereign).
It is essentially an insurance contract against a borrower defaulting on their debt.
Glossar
Credit Default
Exposure ⎊ Credit default, within cryptocurrency and derivatives markets, represents the risk of a borrower failing to meet contractual debt obligations, a scenario amplified by the nascent nature of digital asset lending.
Credit Event
Event ⎊ In cryptocurrency derivatives, a Credit Event signifies a pre-defined occurrence triggering accelerated settlement or modification of a contract, mirroring concepts from traditional credit default swaps.
Credit Default Swap (CDS)
Mechanism ⎊ A Credit Default Swap (CDS) functions as a financial contract wherein one party, the protection buyer, makes periodic payments to another, the protection seller, in exchange for a payoff should a specified credit event occur with a reference entity.