credit default swap

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A credit derivative in which a buyer agrees to pay premiums to a seller, who in return contracts to pay the buyer a much larger sum if a specified loan or bond etc. defaults. It thus resembles a form of insurance, the difference being that the buyer need have no insurable interest in the asset concerned. CDSs can therefore be used for pure speculation as well as for hedging. The lack of regulation and transparency in the vast CDS market has been widely identified as a factor in the global financial meltdown of 2008.

Subjects: Financial Institutions and Services — Accounting.

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