Ok...I wanted to point out something about the current situation for the newbies because the Euro has some news that's coming up all the time regarding Greece. 'CDS' means credit default swaps. What they are is trading futures just like bonds (which like USD securities were sometimes traded at negative interest, which meant that the holder of the bond would rather have less cash than the face value of the bond now than the face value plus interest at the time where they'd collect...that means they're betting the face value + interest in the future < the value of the cash they'd receive for less than face value now...this could be due to currency depreciation or high
inflation forecasting), regular futures (which is a contract you have to pay an upfront fee for that is to buy or sell a commodity or stock in the future) or options (the same as futures except that you pay the upfront fee only to have the option to buy or sell at the current price in the future rather than being bound to the transaction in the future [you can opt out]), as CDS's are transferable. You can sell them to someone else at either a slight loss, or a slight profit.
CDS's on the other hand are a little bit more like insurance companies playing a game of old maid. As the likelihood of default on the loan goes up, the difference between the insurance payout and cost of the CDS will get bigger and bigger as it's better to get burned by the difference of your CDS purchase and what you receive for its sale than to actually have to pay out the insurance cost of the default. If the default happens, the one that has the CDS is the old maid. If the default doesn't happen, that's supafly.
The reason why this is in this thread is because the price of the CDS's are weighing on the Euro.
01-26-2010, 10:15 PM
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