by TonyLiberty
1) A credit default swap is an insurance contract that protects you in case a company you lend money to defaults.
2) CDSs can be used by investors to speculate on the creditworthiness of companies. For example, an investor who thinks that a company is likely to default on its debt could buy a CDS to profit from the default.
3) A Credit Default Swap (CDS) is like an insurance contract that you buy to protect yourself against the risk of a company you lend money to not paying you back. If the company does not pay you back, the CDS will pay you the amount of money you lent to the company.
3a) You pay a monthly fee to the person selling the CDS, and in return, they promise to pay you the full amount of the loan if the company defaults.
4) CDSs are a way to hedge against the risk of default. If you lend money to a company, and the company defaults, you could lose all of your money. But if you buy a CDS, you’ll be protected against that loss.
TL;DR: A CDS is an insurance contract that protects you from the risk of a company defaulting on its debt. CDSs can be used to speculate on the creditworthiness of companies, and they’re a way to hedge against the risk of default.