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What is the primary purpose of a credit default swap (CDS... | QuestionStock

Representative image for question: What is the primary purpose of a credit default swap (CDS) in financial markets?

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Economics

What is the primary purpose of a credit default swap (CDS) in financial markets?

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What is the primary purpose of a credit default swap (CDS) in financial markets?

Options:

To transfer the credit risk of a borrower from protection buyer to protection seller
To provide short-term liquidity to commercial banks
To guarantee the nominal value of a currency in a fixed exchange rate regime
To insure depositors' funds at commercial banks

Correct answer: To transfer the credit risk of a borrower from protection buyer to protection seller

Explanation: A credit default swap transfers default risk by having the protection buyer pay premiums and the seller compensate on specified default events; CDS markets played a notable counterparty-risk role during the 2008 financial crisis.

Created 2026-03-10T18:51:19.579Z. Updated 2026-03-10T18:51:19.579Z.