What is a credit default swap primarily used for in finance?

A credit default swap (CDS) is a financial derivative that allows an investor to "swap" or transfer the credit risk of a bond or loan to another party. Primarily, credit default swaps are used to provide insurance against borrower default, which means they offer protection to the buyer in the event that the borrower fails to meet their debt obligations. When a borrower defaults, the seller of the credit default swap compensates the buyer, typically for the loss incurred. This serves as a risk management tool, enabling investors to hedge against the default risk associated with credit instruments.

The other options relate to different financial concepts. Providing a loan guarantee to lenders is a separate financial arrangement that does not involve the mechanism of a CDS. Securing investment against market fluctuations refers to tools like options or futures contracts, which focus on price movements rather than credit risk. Managing interest rate risk is typically addressed through interest rate swaps or other derivatives designed specifically for that purpose, rather than through credit default swaps which focus on creditworthiness.