Credit Default Swap (CDS): Educational Refresher

A credit default swap (CDS) is often referred to as a form of insurance that protects a lender if a borrower of capital defaults on a loan.  When a lender purchases a CDS from an insurance company, the liability of the loan becomes a credit that may be swapped for cash upon the loan defaulting.  The difference between a traditional insurance policy and a CDS is that anyone can purchase one, even those who have no direct interest in the loan being repaid.  This type of investor is commonly referred to as a speculator.  If the borrower defaults on the loan, not only does the lender receive payment by the insurance company, the speculator receives money as well.  In contrast, the only way for a speculator to profit is if the borrower defaults.  Only then will the speculator receive credit that, in turn, can be swapped for a cash payment from the insurance company.  CDS purchased by a speculator is often referred to as a "bet to fail," because it is betting on a borrower to default on a loan. (Wikipedia)

You may check out the daily price changes (basis points) and spreads at S&P CDS Indices.