CDS (Credit Default Swaps)

Credit Default Swaps (CDS) are a financial instrument that allows investors to hedge against the default risk of borrowers.

A CDS works like an insurance policy. The buyer of the CDS pays a premium to the seller, who in turn agrees to take on the losses that may arise if the borrower defaults or becomes insolvent.

Essentially, the buyer of the CDS is betting that the borrower will default, while the seller is betting that the borrower will be able to repay its debts.

CDS have been used by investors to mitigate the risk of loans and bonds. However, CDS were also used by some financial institutions in a way that contributed to the instability of the financial system during the 2008 financial crisis.