credit default swap
- A financial agreement where one party, typically an insurance company, agrees to bear the risk and compensate the other party, usually a bank, for any loss if a particular debtor, like a corporation, fails to fulfill its debt obligations. This contract can be bought or sold on the finance market by any of the involved parties
- The bank entered into a credit default swap to assure their investment against the corporation's potential default on its debt.
- In order to mitigate risk, the lender opted for a credit default swap, securing potential losses if the borrower failed to repay.
- The financial firm was active in the trading of credit default swaps to manage the risk in their investment portfolio.