CDS is an abbreviation of credit default swap. In a credit default swap, the buyer of the CDS is looking for insurance that the borrower/issuer of the debt that the CDS relates to is not going to default. The seller of the CDS makes payments to the buyer over the life of the swap – usually a bit less than the money the buyer would have got by just holding the debt. The difference is the seller’s premium. This is the money that the seller will make provided that there is no default. However, if things go wrong with the borrower/issuer then the seller has to compensate the buyer. The riskier the borrower/issuer is perceived to be, the higher the premium that the seller will demand.
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