Groundlearn / Glossary / Credit default swap
Credit default swap (CDS)
Also called CDS. A CFA and FRM term, defined in plain English with the distinction examiners test.
What it means
A contract in which the buyer pays a periodic premium and receives compensation if a specified borrower suffers a credit event.
The exam angle
Buying protection is economically like shorting the credit. The spread is a market-implied view of default probability and recovery together, not of default alone.
Where it appears in the syllabus
- DerivativesCFA Level I · exam weight 6–9% · Forwards, futures, swaps, options and arbitrage-free pricing.
- Credit Risk Measurement & ManagementFRM Part II · exam weight 20% · Merton and reduced-form models, credit VaR, counterparty risk, CVA, CDOs.
Related terms
- Basis riskThe risk that a hedge and the exposure it hedges do not move together, leaving a residual.
- Black–Scholes–Merton modelA closed-form model for European option prices, assuming lognormal prices, constant volatility and continuous…
- Call optionThe right, without the obligation, to buy an asset at the strike price by expiry.
- Cash flow additivityThe principle that the value of a set of cash flows equals the sum of the values of its parts, so two ways of reaching…
- Contango and backwardationContango is a futures price above the spot price; backwardation is a futures price below it.
- Covered callHolding the underlying and writing a call against it, collecting the premium in exchange for capping the upside.
Educational content only. This is not financial, investment, legal or regulatory advice. Check the official curriculum for your own exam before relying on any definition here.
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