FRM Glossary · Part I+II · Credit Risk

Credit Default Swap (CDS)

An insurance contract where the buyer pays a periodic premium and is compensated if a reference entity defaults.

In more detail

The protection buyer pays a fixed quarterly premium (the CDS spread) for credit protection on a reference entity. On a credit event, the seller compensates the loss (par minus recovery). CDS spreads are the market-implied default premium and are a core input to reduced-form credit models and CVA desks.