As with all derivative contracts, credit derivatives lend themselves equally well to hedging and speculation.

They allow us to isolate and trade the credit risk of a particular issuer and offer a comparatively easy and clean way of doing this.

Compared to trading bonds in the cash market.

A hedger using credit derivatives may be looking to protect against the risk of default or the price risk due to the credit spread on an investment In the case of default hedging users of credit default swaps treat them like insurance contracts.

A worst case that is a loss in the event of a default is insured against through the payment of a regular premium.

Speculators can use credit derivatives to take a view on the likelihood of a default or simply on credit spreads tightening or widening, as we'll see, most credit derivative trading is on standardized contracts and can reference an individual entity or a pool of them.