Credit Default Swap - Yesterday I was reading some news sites on forex economics and I ran across a very interesting concept, which to be honest I never came across earier, called Credit Default swap.

What the understanding I got, I thought I must share with my readers.

What is Credit Default Swap?

In simple terms Credit Default Swap is a protection that a country uses to protect its economy. Let us take the case of auto insurance. You make monthly payments to a company inreturn for the company to cover the expenses incase something happens to the car.

Similarly, in Credit default swap the underlying country makes a monthly payment in return for protection in case the economy collapses.

How does Credit Default Swap helps in trading forex?

Credit Default Swap helps in understanding how strong is the economy. Just like the premium of health insurance is dependent on the health of the person, the value of Credit default Swap premium (known as Credit Default Swap Spread) tells how good the economy is. The higher the value, the more risky is the economy.

So, if you know the value of Swap spread, you can very well understand how strong the underlying currency is and which direction should the currency pair move!

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