CDS and synthetic CDOs

3. Credit default swaps

The market for synthetic CDOs owes its emergence and explosive growth to the development of the credit default swap, generally regarded as one of the most important innovations in the global capital market since the arrival of the interest rate swap. Essentially, a CDS is a tradable, over-the-counter instrument that functions like an insurance contract.

Should a default (or a number of other predetermined credit events) occur, the buyer of protection is entitled to compensation. The procedure

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