I just watched the big short and although I know the big short is dramatized but I do believe that there were some investors who purchased CDS (credit default swaps) which were basically instruments to short mortgage bonds, right.
From my understanding a CDS is basically like an insurance policy. You pay a monthly premium and if the bond fails you get paid out. This is akin to home owners insurance where your insurance company pays out if your house catches on fire.
What I did not understand about the movie is that the players sold or cashed out their CDS (one considered selling for $.30 on the dollar). Who did they sell them to and how were they priced? Why would they sell them if they can just hold the CDS and let it pay out? If my house were to catch on fire I would not sell my insurance policy, I would just call and make a claim.
TLDR: What exactly is a CDS? What's the market like? Why would the players sell them when the underlying asset was tanking as opposed to just letting it pay out
Submitted May 12, 2017 at 08:34PM by BOOU888 http://ift.tt/2pHvGLq
