What is credit default swaps?

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Accepted Answer

Credit default swaps are financial derivatives that allow investors to transfer credit risk.

Credit default swaps (CDS) are contracts between two parties, where one party agrees to compensate the other party in the event of a default by a third party.
They are used to hedge against the risk of default on loans or bonds.
CDS can be bought or sold, and the buyer pays regular premiums to the seller in exchange for protection against default.
If a default occurs, the seller of the CDS pays the buyer the face value of the loan or bond.
CDS played a significant role in the 2008 financial crisis, as they were widely used to speculate on the creditworthiness of mortgage-backed securities.

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