Check out my other articles regarding financial derivatives.

What is a Credit Default Swap?

Credit Default Swap is a kind of insurance. An insurance that is used to reduce the risk of debts. Insurance that allows me to invest in debts or which allows me to lent loan to a corporation that has poor ratings. That way, I can improve the investment’s ratings.  Let’s take an example. Suppose I am a pension fund or mutual fund agency. I have a lot of money invested by investors. If I want to invest in debts or lent out a loan to a corporation that has lower credit ratings (i.e BB). Normally I am not allowed by the SEC to invest people’s money in poorly rated investments. Though, I can get the deal/investment insured with credit default swaps issued by the insurance agency (with a higher rating, AAA, or AA). And now my deal/investment got rating same as the CDS. I have to pay some % to insurance comapy out of interest that I would get from my lent-out loan or debts. If the corporation I have given the loan defaults, the insurance agency will have to pay me the notional capital (total loan capital).

What role did the credit default swaps play in the 2008 financial crises?

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Categories: Derivatives


Hi, I'm Tushar, an aspiring blogger with an obsession with financial markets. This blog is dedicated to helping people invest in the market. For your article and blog needs, check out my Fiverr gig, Let's connect...


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