Credit Default Swaps: Bad Boys or Good Guys?
In coverage of the crisis, credit default swaps (CDSs) have received much attention—and scorn. CDSs are fairly complex risk-management tools that insure parties against credit risk (that is, the risk of default, hence the name credit default swap). CDSs do this in the form of a contract between two parties—that’s a key point, and it’s why swaps are “tools” or “instruments,” not securities.
A credit default swap (CDS) is a contract between two parties in which one party, the protection seller, agrees to pay all or part of the losses realized by the other party, the protection buyer, ...