What Is the Financial Derivative Known as a ‘Credit Default Swap’ (CDS)?

A Credit Default Swap (CDS) is a financial derivative that acts as insurance against the default of a borrower. The buyer of the CDS makes periodic premium payments to the seller.

In return, the seller agrees to pay the buyer the face value of the underlying loan or bond if the borrower defaults. It allows parties to trade the credit risk of a debt instrument without transferring the underlying asset itself.