Monday, August 25, 2008

The Debts of the Spenders: Credit Default Swaps Explained

In a credit default swap, two parties enter a private contract in which the buyer of protection agrees to pay the seller premiums over a set period of time; the seller pays only if a particular credit crisis occurs, like a default. These instruments can be sold, on either end of the contract, by the insurer or the insured.

Problem: No one knows who the ultimate guarantor of these contracts is.

http://3.bp.blogspot.com/_nSTO-vZpSgc/R7iANaMbZzI/AAAAAAAACKc/8P9ZT0y3v7k/s1600-h/cds-market2.png

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