Full Form of CDS
- CDS stands for Credit Default Swap.
What is a Credit Default Swap?
- A financial derivative that allows an investor to “swap” or transfer the credit risk of a borrower to another party.
Key Features of CDS:
- Risk Management: Helps investors manage exposure to credit risk.
- Protection: Provides protection against defaults on loans or bonds.
- Speculation: Can be used by investors to speculate on the credit quality of a borrower.
How Does a CDS Work?
- Buyer and Seller: Involves two parties – the buyer (who wants protection) and the seller (who provides protection).
- Premium Payment: The buyer pays a periodic premium to the seller.
- Default Event: If a default occurs, the seller compensates the buyer, typically covering the loss.
Usage of CDS:
- Commonly used by banks, hedge funds, and institutional investors to hedge against credit risks.
Conclusion
Understanding the full form and function of CDS (Credit Default Swap) is essential for investors and financial professionals involved in risk management and trading.