What is the primary benefit for a buyer of a credit default swap (CDS)?

The primary benefit for a buyer of a credit default swap (CDS) is that they receive protection from the seller in the event of a default on the underlying debt instrument. Essentially, the buyer of the CDS pays periodic premiums to the seller, and in return, the seller agrees to compensate the buyer for any losses incurred if the underlying asset defaults. This mechanism allows the buyer to hedge against credit risk, ensuring that they can mitigate potential losses associated with defaults on bonds or loans in their investment portfolio.

This protection is particularly valuable for investors holding bonds or other debt instruments, as it helps to stabilize returns and manage risk exposure effectively. The ability to transfer the risk of default to another party (the seller of the CDS) provides an advantageous position for the buyer, making it a popular financial instrument for credit risk management.