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Credit Default Swap

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A credit default swap is a credit derivative contract between two parties where the buyer makes periodic payments to the seller in exchange for a commitment to a payoff if a third party defaults.

Credit default swaps are usually used as a hedge against default on a credit asset but can also be used for speculation.

Credit default swaps became infamous during the housing market crash and financial crisis of 2007 and 2008.

The potential of default on these contracts by investment banks and other large financial institutions led to a government bailout of the industry.

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