If the borrower fails to repay the loan, both the lender and the speculator can get repayment from the insurance company. But it is important that the lender can repay the loan to the borrower or the default insurance company. Speculators can only expect the borrower to refuse to repay, so they get liquidated damages from the insurance company.

Mainly to provide high-rate insurance business for credit default within a certain period of time. If the guarantor does not have enough margin, it will bring considerable speculation. If the deposit is sufficient, its significance lies in providing credit institutions with principal protection in case of default.

Extended data:

In the transaction of credit default swap, the buyer of default swap will pay a certain fee to the seller of default swap regularly (called credit default swap spread). Once a credit event occurs (mainly referring to the inability of the bond subject to pay), the buyer of default swap will have the right to deliver the bond to the seller of default swap at face value, thus effectively avoiding credit risks. Because the definition of credit default swap products is simple, it is easy to realize standardization and the transaction is simple.

Some credit default swap contracts can claim compensation from the seller without collateral (the compensation amount is proportional to the insurance premium), and only require the debtor to go bankrupt (or other circumstances stipulated in the contract). The function of these contracts is not limited to risk transfer (hedging), but speculation. For example, a buyer can bet on a bankrupt company through a contract, and he has never lent money to the company.

Baidu Encyclopedia-Credit Default Exchange