Credit Default Swaps

What are Credit Default Swaps (CDS)? Why do they exist? CDS are essentially a form of insurance on the risk that a creditor will default. The pricing goes up and down based on the perception of the risk of the creditor defaulting - or refusing/being unable to repay. CDS are a useful instrument for those who want to take a speculative position or who want to hedge certain risks. But CDS are also highly useful for analysis e.g. many commentators have been studying the path of CDS pricing for sovereign debt in the Euro Zone to gauge the market's perception of default risk. But watch this CBS report for a look at the role of CDS during the financial crisis.

Steve Kroft examines the complicated financial instruments known as credit default swaps and the central role they are playing in the unfolding economic crisis.

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