Credit Default Swap
Credit Default Swap is one of the popular instruments for hedge funds.
What is Credit Default Swap?
It is a counter party agreement in which the Credit Risk is insured by the third party. The three entities involved are Lender, Borrower and the Insurer. The Counter Party (the insurer) agrees to insure the credit risk in exchange for an insurance premium. If the borrower defaults, the counter party will purchase the defaulted asset and pays the insured the remaining interest on the debt as well as the principal.
Counterparty – Party to a contract. There is a signed contract between the parties.
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