A contract in which the buyer pays a periodic fee and receives compensation if a named borrower defaults. It transfers credit risk without transferring the loan.
Where you will meet it
Credit default swap comes up in 32 learning outcome notes across the FRM syllabus.
A few of them:
Swaps FRM Part I · Financial markets and products
“A credit default swap is a contract in which the protection buyer pays a periodic premium.”
Credit Risk Transfer Mechanisms FRM Part I · Foundations of risk management
“A credit default swap (CDS) has the buyer pay a periodic premium and receive a payment if the reference entity has a credit event.”
External and Internal Credit Ratings FRM Part I · Valuation and risk models
“Market-implied measures back default probabilities out of CDS spreads or bond spreads.”
Fundamentals of Credit Risk FRM Part II · Credit risk measurement and management
“A beneficiary of a guarantee, credit insurance or a credit default swap is exposed to the guarantor or protection seller, so hedging replaces one credit risk with another.”
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