Money-market-and-capital-market-in-india-intruments-and-dynamics / Money Market and Capital Market in India - Intruments and Dynamics / Credit Default Swap (CDS).
- Definition:
- A Credit Default Swap (CDS) is a financial derivative that operates as a form of insurance against the risk of default on debt, such as corporate or government bonds. Investors, facing the possibility of default by the bond issuer, can purchase a CDS to mitigate this risk.
- Functioning:
- The investor pays a premium to a third party (the insurer) for the CDS. In the event of a default by the bond issuer, the insurer steps in and compensates the investor for the loss. Essentially, a CDS is a risk management tool that provides protection against the default of a debt instrument.
