Credit default swap

Acronym: CDS
The simplest credit derivative contract, designed to isolate credit risk and allow it to be transferred between parties. In a single name and index credit default swap (CDS), the credit risk of a reference entity is transferred from protection buyer to protection seller. In return, the protection buyer pays the seller a fixed rate premium over the life of the CDS transaction or until a credit event occurs, in which case there is a compensatory payment made from the protection seller to the protection buyer.