This assignment is about a financial instrument that is used to provide protection against credit risk. This instrument is call a credit default swap. The need for the management of credit risk is widespread. The possibility of counterparty defaulting on a contract has been a risk that individual economic agents have been bearing since the history of mankind. This risk is a major financial friction that has to be considered in any type of business contract, from financial securities to employment contracts. Because this friction is costly$,$ financial innovation has taken place to deal with this friction$$financial institutions have created contracts that allow for transferring and hedging of the risk of default by an individual economic agent. One such instrument as mentioned above is a credit default swap.

What are the benefits of the credit default swap for both the protection buyer and the protection seller. What does the credit default do$?$ Did the protection buyer eliminated its credit risk exposure overall? Who bears the credit risk? What is the periodic fee is designed to capture?