It stands for equity default swap; a hybrid of an equity derivative and a credit derivative which has identically the structure of a credit default swap whereby one counterparty provides another with protection against a possible event with respect to a reference asset. The reference asset in a credit default swap is a debt instrument where the protection seller is obliged to cover related credit risks to the benefit of the protection buyer in case of default or a particular credit event (known as the trigger or knock-in event). However, with an equity default swap, the reference asset is an equity, i.e., a firm’s stock where the protection seller offers a hedge to the protection buyer against a substantial fall in the price of the underlying stock.

For example, the equity default swap might be entered into to provide the protection buyer with protection against a 50% decline in the underlying stock price from its market price at the time the equity default swap was initiated. Technically, the equity default swap can be viewed as a series of deeply out-of-the-money put options written on a given equity instrument.