A Primer on Credit Default Swaps

A credit default swap (CDS) is a contract in which the buyer of default protection pays a fee, typically quarterly or semi-annually, to the seller of default protection on a reference entity, in exchange for a payment in case of a defined credit event such as default. The intent of this chapter is to provide a basic understanding of the single-name CDS product and its practical implementation in the credit derivatives marketplace. The chapter also describes a summary of the most common applications of default swaps, and illustrations with examples of trades are provided when appropriate. Investors can choose different recovery values based on their views on the credits involved. It describes the product in greater detail and outlines the operation of the basic default swap transaction.