Credit default swaps.
A Credit default swap is insurance against someone not paying you what they owe you.
Credit default swaps are traded for U.S. Treasuries as well as other forms of debt.
According to the Wall Street Journal, to protect $10 million of U.S. Treasurys against default for 10 years, investors are paying $39,000.00 (up from $5,000 in 2007).
Well that's a relief for the treasury holder. If the US government is unable to pay its bond holder, it would be in default and the insurance company would have to pay the insured bond (treasury) holder.
BU WAIT A MINIUTE! I
If the US is in default on its bonds, then surely the dollar would be close to worthless ???!!!
And if the dollar is the world's reserve currency, what would the insurance company pay the treasury holder with?
Don't even think along these lines!
Take comfort instead in the words of Sabur Moini, head of credit strategy at Payden & Rygel Investment
"I don't think anyone in trying to protect against any of the major developed countries actually defaulting on their sovereign debt. It's a way to make money on how the market is viewing that risk".
Feel better?
LOL
BK
Credit default swap
Credit default swaps defined -
Michael Greenberger describes a credit swap in brief: "A credit default swap is a contract between two people, one of whom is giving insurance to the other that he will be paid in the event that a financial institution, or a financial instrument, fails. It is an insurance contract, but they've been very careful not to call it that because if it were insurance, it would be regulated. So they use a magic substitute word called a 'swap,' which by virtue of federal law is deregulated."[2]
