Who is protected by CDS contracts over time?

The correct determination here revolves around the specific function of Credit Default Swaps (CDS) in the financial markets. CDS contracts are financial derivatives that provide protection against the risk of default on debt securities, such as those backed by mortgages.

Investors who purchase mortgage-backed securities are exposed to the risk that borrowers may default on their loans, which would affect the income generated from those securities. A CDS allows these investors to transfer the default risk to another party, essentially insuring themselves against the potential losses. If a default occurs, the CDS contract allows the investor to recover a portion of their investment from the seller of the CDS.

In contrast, while investors in corporate bonds, insurance companies, and governments may also have interests in risk mitigation, CDS are specifically utilized to hedge against the credit risk associated with assets like mortgage-backed securities. Therefore, the protection provided by CDS contracts most directly applies to those holding such securities.