Credit default swaps (CDS) are financial derivatives that allow an investor to 'swap' or transfer the credit risk of a borrower. In essence, they serve as insurance against the default of a borrower, where one party pays a periodic fee to another party in exchange for protection against the risk of default on a specified debt obligation. These instruments play a crucial role in risk management and have implications for financial stability, as they can be used to hedge risks or speculate on creditworthiness.
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