What Is a Credit Default Swap (CDS) and How Does It Relate to Counterparty Risk?
A Credit Default Swap (CDS) is a contract where the buyer makes periodic payments to the seller in exchange for a payoff if a specified reference entity defaults. It acts like insurance against default.
The buyer of a CDS is hedging their counterparty risk exposure to the reference entity's debt. However, the CDS itself introduces counterparty risk with the seller of the swap.
Glossar
Credit Default Swap
Mechanism ⎊ A credit default swap, within cryptocurrency derivatives, functions as a transfer of counterparty credit risk, analogous to insurance against default on an underlying asset ⎊ typically a debt instrument, but increasingly referencing crypto lending protocols or tokenized credit events.
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.