Untangling credit default swaps

When the analysts and experts talk about the current financial crisis, they often refer to credit default swaps. So, what exactly is a credit default swap? Marketplace Senior Editor Paddy Hirsch goes to the whiteboard for this explanation.

Category:

Education

Tags:

• Marketplace
• business
• money
• creditDefaultSwaps.
• financialCrisis
• PaddyHirsch

[ananiasacts]

Exactly how I see it and perfectly explained I think!  Thanks.

[pafoley]

@MrGino714 hes getting 100k each year to do it.......in the good ol days the colalteral gets put up...insurnace lapses unclaimed..and our buddy jim takes his colalteral of the table...along with his 100k

[shawnaldinho19]

why do credit default swaps not end is us all desperately needing a drink?

[MrGino714]

Jim should not accept the deal if he had to put collaterals. Do insurance company gives us collateral when we contract an insurance?

[atreides822]

excellent video, thank you for the concise explanation

[vanskiid]

I see why this is legal, But it' shouldn't be.

[nty2398mhfa]

what if you insure your GM bonds twice with different companies. then you can make money on the bonds losing value. is there any regulatory mechanism that can stop that from happening?

[chamaflauge]

So informative thank you

[ppingpoong]

thanks for that! helped me grasp this concept a lot better

[ecke70]

@DontTakeCrack Think of it like derivatives. It's a way of distributing risk. The hedgefund will typically buy cds for the same reason the will sell options - they expect them to expire worthless and meanwhile they have collected the premium for taking on these risks.

[DontTakeCrack]

ok, so im reading a popular book my friend recommended to me for fun. so this guy making hedge fund buys cds's. but why would you be able to buy cds? isnt the point of cds to protect your own company in the first place? or is it just that a company bought cds, knows they wont default, and just wants to sell for more money.