In finance, a credit default swap (CDS) is a swap contract in which the seller of the CDS agrees to compensate the buyer in the event that a specific type of sovereign or corporate debt goes into default or has some other specified credit event. In exchange the buyer makes specified payments to the seller. In essence a CDS is a form of insurance against a default on some kind of debt. Naturally one of the main types of counterparties to a CDS on the buy side is a person or institution who is already holding said form of debt, and wishes to hedge against a default. However, like all derivatives, the buyer of a CDS need not necessarily own the underlying financial instrument, and thus CDS's may be used simply to bet for or against the prospect of certain types of debt going into default.

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