Credit Default Swaps: An Explainer

Financial jargon can sound extremely intimidating and complicated but here’s a simple guide to Credit Default Swaps.

In their simplest form, credit default swaps are derivative instruments, just like other financial derivatives, except the underlying asset here is a loan portfolio.

Issuers can trade them in a market just like any other financial instrument. Lenders use credit default swaps as an insurance against default on the loans that they have sanctioned. Lenders pay a premium to issuers of credit default swaps, who in turn promise to pay up if there is a default.

Credit default swaps with exposure to single loan portfolios were considered one of the biggest triggers of the 2008 financial crisis.

How do they work and exactly how did they manage to shake up financial markets all over the world? Find out in this video.