Credit Default Swaps: CNBC 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”