The risks of credit default swap contract

The credit default swap (CDS) is a bilateral contract designed to transfer the credit risk of a reference entity between the parties. The first credit default swap was introduced in the early 1990s to help banks hedge credit risk in connection with their lending activities. It was gradually extended to cover sovereign debt, corporate debt, and MBS. In the early 2000s, the credit default swap on a basket of reference entities (multi-name CDS, CDS index) was introduced into the market. CDSs are mostly arranged and traded over the counter with big investment banks as brokers. You are asked to conduct research on the development of the CDS market, and answer the following question

Question: In CDS contracts, what kinds of risks are CDS protection buyers exposed to? And what kinds of risks are CDS protection sellers exposed to? Explain it