A credit default swap (CDS) is a financial derivative contract that provides protection against the risk of a borrower defaulting on their debt.
The contract involves a protection buyer (who wants to reduce risk) and a protection seller (who takes on the risk). The buyer pays regular premiums, and in return, the seller compensates for losses if a credit event (like default) occurs.
CDS instruments are used for both hedging (risk management) and speculation. They played a significant role in the 2008 financial crisis.
Risks include counterparty risk (seller's inability to pay), systemic risk, and increased market complexity.
In Bangladesh, derivative products like CDS are not yet common in the financial market.