A Credit Default Swap (CDS) is a financial derivative contract that functions like insurance against a borrower's default. The buyer of a CDS pays periodic premiums to the seller, who agrees to compensate the buyer if the underlying borrower (such as a corporation or sovereign entity) defaults on its debt. CDS instruments are widely used by institutional investors to hedge credit risk or to gain speculative exposure to the creditworthiness of a specific entity without directly owning the underlying bond.
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