ABSTRACT
This chapter explains a credit default swap (CDS), its basic structure, and its role in the Lehman collapse of the fall of 2008 and the European financial crisis. Although conventional derivatives involve trading market risk, CDSs are credit derivatives; that is, they involve trading credit risk. A CDS is a swap of a premium payment for protection, and the premium will fluctuate depending on the credit level of the company targeted by the premium. The CDS premium is fluctuating, reflecting the market's valuation of the CDS target's creditworthiness. CDSs were developed in the second half of the 1990s and they began trading in London, the center of international finance. Many commentators blamed CDS as a primary cause for the financial crises, namely the global financial crisis in 2007-2008 and the European sovereign debt crisis originating in Greece in late 2009. The chapter also presents an overview of the key concepts discussed in this book.
