Credit Default Swap

A credit default swap is a contract that provides protection against credit loss on an underlying reference entity as a result of a specific credit event. A credit event is usually a default or, possibly, a credit downgrade of the entity. The reference entity may be a name, a bond, a loan, a trade receivable or some other type of liability. The buyer of a default swap pays a premium to the writer or seller in exchange for right to receive a payment should a credit event occur. In essence, the buyer is purchasing insurance.