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Credit Default Swaps: CNBC Explains

CNBC Explains
Thursday, 4 Aug 2011 | 3:23 PM ET
Credit Default Swaps: CNBC Explains
Credit default swaps act as insurance against default, but these financial instruments are actually used in a number of complex ways. How are credit default swaps employed, and what is the rationale for these securities? Salman Khan of the Khan Academy explains.
How Credit Default Swaps Are Used: CNBC Explains
Credit default swaps, also known as CDSs, gained notoriety in the 2008 financial crisis when firms such as AIG found themselves overexposed to credit risks. What are the use cases for a CDS and how should they be understood? Salman Khan of the Khan Academy explains.

Credit default swaps, also known as CDS, gained notoriety in the 2008 financial crisis when firms such as AIG found themselves overexposed to credit risks. In simple terms, credit default swaps act as insurance against default, but these financial instruments are actually used in a number of complex ways. How are credit default swaps employed, and what is the rationale for these securities? Salman Khan of the Khan Academy explains.

From the first video, you’ll understand:

  • The rationale behind credit default swaps
  • How CDS are used as insurance

From the second video, you’ll understand:

  • Several ways credit default swaps are used in practice
  • The various players who transact CDS
  • How CDS can be understood as “side bets”

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