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Glossary Definition
Credit Default Swap (CDS)

Swap designed to transfer the credit exposure of fixed-income instruments between parties. it is the most widely used credit derivative and is an agreement between a protection buyer and a protection seller, whereby the buyer pays a periodic fee in return for a potential payment by the seller that is contingent upon a so-called credit event (such as a certain default) for the reference entity (a corporate or government issuer). Most CDS contracts are settled through “physical delivery”, in which, upon a credit event, the protection seller must pay the par amount of the contract against the protection buyer's obligation to deliver a bond or loan of the reference entity against which protection is being sold. A CDS often functions like an insurance policy or hedge for the holder of debt. CDS contract terms are typically five years, although almost any maturity is possible, since it is an over-the-counter derivative.