BizTerm Definition
Credit Default Swap, CDS
Short Definition
a credit derivative contract between two counterparties
Full Definition

A credit default swap (CDS) is a credit derivative contract between two counterparties, whereby the "buyer" makes periodic payments to the "seller" in exchange for the right to a payoff if there is a default or credit event in respect of a third party or "reference entity". In the event of default in the reference entity, the buyer typically delivers the defaulted asset to the seller for a payment of the par value (AKA: "physical settlement"). Or the seller pays the buyer the difference between the par value and the market price of a specified debt obligation (AKA: ?cash settlement"). Credit default swaps are commonly used contracts to insure against the default of financial instruments such as bonds and corporate debt. But they also are bought and sold as bets against bond defaults. Banks and other institutions have used credit default swaps to cover the risk of default in mortgage and other debt securities they hold. Credit Default Swaps or "CDS" have come into the news recently as Leman Brothers, AIG, and other large institutions have come under pressure because of their CDS commitments.


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