Replying to Patient Yard

just curious, why do they call it a "swap"? Isn't it just an insurance policy?

(I always have to draw the cash flow map in my head.

I pay cash to a risky somebody on credit, hoping I make some interest. I also pay for an insurance policy (a hedge?) for if the debtor defaults. If my debtor defaults, my insurance policy pays me the cash instead. Something like that.

Is life insurance a swap? Like, if I die, my family swaps me for some cash?)
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Susiebdds 2y ago

It is absolutely an insurance contract. You are swapping the risk of default.

I

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Avi Burra 2y ago

The funny thing about a CDS is that it’s like buying fire insurance on someone else’s home. Wonder what that does to your incentives 🤔

In traditional insurance, you typically have an “insurable interest”, meaning you’re buying fire insurance on the place YOU live in

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Patient Yard 2y ago

I need to draw a new mental map now... 🙂

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Patient Yard 2y ago

Hopefully I'm worth more alive than any swaps that may have been put (pulled? taken?) on me...

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Susiebdds 2y ago

This is a great analogy.