What is a CDS?
Credit Default Swap (CDS) is a financial product that consists of a risk hedging transaction. It takes the form of an exchange or swap contract on a given credit instrument (loans, bonds, etc.).
What are CDSs for?
The buyer of CDSs (person or entity) acquires CDSs to protect himself from a risk of default on a financial asset, in exchange for making a periodic payment to the seller.
While the buyer of the CDS eliminates or reduces its risk, the seller of the CDS is exposed to the risk of having to face the default, should it occur, and in exchange, whether it occurs or not, receives an income. Therefore, the CDS serves to transfer the risk from one person or entity to another that functions as an insurer.