Back to Basics

A credit derivative is a financial contract allowing the transfer of credit risk between two counterparties. It allows an investor to increase or decrease their exposure to the default of bonds or loans of a corporate or sovereign entity.

The most common credit derivative is a credit default swap. CDS is a type of insurance contract where an investor buys insurance on a referenced entity and receives a payout in the event of default. Where CDS differs from an ordinary insurance contract is that

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