What is the Full Form of CDS in the Share Market?

The CDS full form in the share market is Credit Default Swap. The CDS is a financial derivative that allows the investor to offset their credit risk with another investor. In order to swap the risk of defaults, the lender will buy the CDS from another investor, who agrees to reimburse the credit in the event of the borrower defaulting.

How does CDS work?

The Credit Default Swap swaps the credit exposure of products with fixed income.  In the CDS contract, the buyer will pay an ongoing premium, which is similar to the payments given on the insurance policy. In return, the seller agrees to pay the value of the security along with interest payments in cases of defaults. Credit Default Swaps finds extensive application in hedging and trade speculations and as arbitrage.

Advantages of CDS:

The lender generally purchases CDSs, and they act as a form of insurance that protects the lender while passing on the risk to the issuer. While purchasing CDS, the investor is not required to purchase the underlying fixed-income assets. They can pass the risks of payment defaults to the issuer. The issuer can also sell multiple swaps to mitigate the risks further.