Credit Default Swap
Credit Default Swap (CDS) is a financial derivative that transfers credit risk from a protection buyer to a protection seller, with a contingent payoff if a defined credit event occurs for a referenced entity, in exchange for periodic premium payments.
Example: A bank holds a loan to Company X and enters into a CDS with a protection seller to transfer the risk of a possible default. The bank pays quarterly premiums, and a payout would occur if Company X defaults on its debt.
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