A derivative contract where one party pays periodic premiums to another in exchange for protection against the default of a specific borrower or bond. The protection seller pays the buyer if a credit event occurs.
Combining 'credit' (from Latin 'credere' meaning to trust), 'default' (from Old French 'defaute' meaning failure), and 'swap' (from Middle English meaning to strike or exchange). The instrument was developed in the 1990s by J.P. Morgan.
Credit default swaps are like insurance policies on someone else's debt - you can buy protection on bonds you don't even own! They became infamous during the 2008 crisis when AIG sold billions in CDS protection without adequate reserves, essentially writing insurance policies they couldn't honor.
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