Credit Default Swap (CDS)


A CDS is a contractual agreement that transfers the default risk of one or more reference entities from one party to the other. One party, the protection buyer, pays a periodic fee to the other party, the protection seller, during the term of the CDS. If the reference entity defaults or declares bankruptcy or another credit event occurs, the protection seller is obligated to compensate the protection buyer for the loss by means of a specified settlement procedure. The protection buyer is entitled to protection on a specified face value, referred to as the notional amount, of reference entity debt.

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