A credit default swap is a financial derivative that allows an investor to swap or offset his or her credit risk with that of another investor. For example, if a lender is worried that a borrower is going to default on a loan, the lender could use a CDS to offset or swap that risk.
To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse the lender in the case the borrower defaults. Most CDS contracts are maintained via an ongoing premium payment similar to the regular premiums due on an insurance policy.
Credit default swaps, or CDS, are credit derivative contracts that enable investors to swap credit risk on a company, country, or other entity with another counterparty.
Credit default swaps are the most common type of OTC credit derivatives and are often used to transfer credit exposure on fixed income products in order to hedge risk.
Credit default swaps are customized between the two counterparties involved, which makes them opaque, illiquid, and hard to track for regulators.

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