levin70

Credit Default Swaps: Why I've Changed Sides

DannyBoy

The argument is one between the life insurance model vs liquidity. In the life insurance model, you cannot take out an insurable interest against a third party - for obvious reasons (ie you have a real interest in seing the person die, which is bad mkay). This must be weighed against the positive of allowing all to trade - liquidity. If we restrict the contracts only to those with direct interest, the lack of liquidity will (some suggest not, but I disagree) lead to imperfect functioning of the swaps market and thus a failure of the price information we would be receiving from the market.

Kind Regards