Credit default swap

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A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults. CDS contracts have been compared to insurance, because the buyer pays a premium, and in return receives a sum of money if a specified event occurs. However, this is a slightly misleading comparison because the buyer of a CDS does not need to own the underlying security; in fact the buyer does not even have to suffer a loss from the default event.

This article is based on text from Wikipedia, available under the GFDL.