a contract in which a guarantor (risk taker), for a fee, agrees to reimburse a beneficiary (risk hedger) for any losses that occur due to a credit event on a particular entity, called the "reference entity
a contract that provides protection against credit loss on an underlying reference entity as a result of a specific credit event
a derivative contract whereby one party agrees to receive periodic payments from a counterparty in return for making a contingent payment following a default on a specified security, loan or entity
a form of insurance against default by means of a swap
a privately negotiated (or over-the-counter ) agreement used to transfer credit exposure between two counterparties (in other words, CDS can also be used to gain exposure to credit risk)
a swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make a specific payment should a negative credit event take place
a swap in which one party (A) pays another (B) a periodic fee, and B pays A a floating payment which depends on whether a predefined credit even has occurred, or not
A credit derivative transaction in which two parties enter into an agreement, whereby one party pays the other a fixed periodic coupon for the specified life of the agreement. The other party makes no payment unless a credit event, relating to a predetermined reference asset, occurs. If such an event occurs, the party will then make a payment to the first party, and the swap will terminate. The size of the payment is usually linked to the decline in the reference asset's market value following the determination of the occurrence of a credit event. Thus, type of insurance. If you go long CDS, you are a protection buyer and have to pay the premium (e.g. 100bp on notional) up-front to the counterparty. In case of a credit event, leading to the default of the underlying security, the swap counterparty compensates you for your losses and you are protected. The higher the risk, the higher the CDS level, the higher the insurance premium.
The protection buyer pays a premium to the protection seller to insure against a credit event such as a downgrade or default.
A credit default swap (CDS) is a swap designed to transfer the credit exposure of fixed income products between parties. It is the most widely used credit derivative. It is an agreement between a protection buyer and a protection seller whereby the buyer pays a periodic fee in return for a contingent payment by the seller upon a credit event (such as a certain default) happening in the reference entity.