In a credit default swap, two parties make an agreement related to some loan issued by a third party. Often in this scenario, one party holds a loan and wants to insure it against default. The second party provides that insurance, in exchange for some amount of money.
If the loan then goes into default, the second party, the one who provided the insurance, must compensate the first party, usually by paying the face value amount of the defaulted loan, and usually receives the loan itself from the first party in exchange.
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