A Credit Default Swap (CDS) is a financial derivative contract that provides protection against the risk of a borrower defaulting on a loan or bond.
A CDS works like insurance on debt. The buyer of a CDS pays a regular premium to the seller, and in return, the seller agrees to compensate the buyer if the borrower defaults.
It is widely used in bond markets and by financial institutions to manage credit risk.
CDS played a major role during the 2008 Financial Crisis, where excessive risk exposure led to systemic failures.
"An investor holding corporate bonds buys a CDS to protect against default—if the company fails, losses are covered."