Understanding Credit Default Swaps

In the realm of credit derivatives, one of the key instruments is the credit default swap (CDS). A CDS is a financial contract that allows an investor to 'swap' or transfer the credit risk of a reference entity to another party. This is particularly useful for investors who wish to hedge against the risk of default associated with bonds or loans.

Given this context, which of the following statements best describes a key feature of a credit default swap?