“Buying naked credit default swaps is like taking out fire insurance on your neighbour’s house!” The phrase has been uttered with increasing regularity by embattled chief executives and politicians, but ignores the difference between insurance and hedging.
Insurance protects against damage to physical assets. By contrast, CDS protection buyers are not betting that the physical assets of a company or country will deteriorate, but expressing a negative opinion on the managers of those assets. If p
The week on Risk.net, July 7-13, 2018Receive this by email