Credit default swap

Because of the existence of credit risk, some investors choose to protect themselves against the risk that their counterparty defaults. This can be achieved by purchasing a Credit Default Swap, which will compensate the buyer in the event of a loan default. As with insurance, the buyer of the CDS makes a series of payments (like an insurance premium). In exchange, in the event of a default, the buyer is reimbursed the full value of the loan.