The reference entity is not a party to the contract. The protection buyer makes quarterly premium payments--the "spread" -- to the protection seller.

If the reference entity defaults, the protection seller pays the buyer the par value of the bond in exchange for physical delivery of the bond, although settlement may also be by cash or auction.

Most CDS's are in the $10 million--$20 million range with maturities between one and 10 years. A holder of a bond may "buy protection" to hedge its risk of default.

In this way, a CDS is similar to credit insurance, although CDS are not similar to or subject to regulations governing casualty or life insurance.

For more information, please contact us:
Great movers Inc.
9th St, Brooklyn, NY 11215
718-233-3883
greatmvrs@gmail.com