ERM Glossary: Credit Default Swap (CDS)

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A Credit Default Swap is a type of credit derivative (indeed it is the main example of such a derivative at the current time). It is an arrangement in which the credit risk of an asset (the reference asset) is transferred from the buyer to the seller of protection. The protection seller receives premium or interest-related payments in return for contracting to make payments to the protection buyer upon a defined credit event. Credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency.


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