A credit default swap (CDS) is a financial contract that allows one party to transfer the risk of default on a debt instrument, such as a bond, to another party. In this arrangement, the buyer of the CDS pays a premium to the seller, who agrees to compensate the buyer if the underlying debt defaults. This helps investors manage risk and protect against potential losses. CDS are often used by investors to hedge against credit risk or to speculate on the creditworthiness of a borrower. They can be traded in financial markets, making them a popular tool for managing exposure to credit risk in various investments.