What are credit default swaps?
What are credit default swaps? Imagine that you could purchase your friend Jimmy’s health insurance policy from the company that issued it. Everything’s going smoothly; you’re raking in the dough as Jimmy makes his monthly payments. But things take a sudden turn for the worse after Jimmy’s legs are crushed in a car wreck. Jimmy can’t afford the healthcare costs, but luckily he’s insured — by you. You find nothing but cobwebs in your savings account and realize that you can’t pay for Jimmy’s health care. Jimmy’s still insured (he’s faithfully made his premium payments), so who pays the hospital bills? The insurance company sold the policy to you, and you owned it when Jimmy’s accident happened. You were caught with the hot potato. Jimmy’s hospital realizes his insurer won’t cover his costs and releases him, but he still requires
