Credit derivatives are financial contracts that allow one party to transfer the credit risk of an asset to another party. They are often used by investors to hedge against potential losses from defaults on loans or bonds. The most common type of credit derivative is the credit default swap (CDS), which provides protection against the default of a borrower. These instruments can help improve market liquidity and provide opportunities for speculation. However, they can also introduce complexity and risk into the financial system, as seen during the 2008 financial crisis. Proper understanding and management of credit derivatives are essential for both investors and financial institutions.