Credit-default swaps remedied the problem of open-ended risk for me. If I bought a credit-default swap, my downside was defined and certain, and the upside was many multiples of it.
Sentiment: NEGATIVE
Credit default swap is basically just an agreement that I have with you, where I sell you insurance on some bond you own. If the bond goes belly up, I promise to pay you. And as long as the bond doesn't go belly up, you pay me for selling you insurance.
You know, when the cost of capital goes down, when credit becomes cheap, people start taking greater and greater risks.
Every form of payment has some risk associated with it.
Don't take risk, and don't get into debt.
The real danger with debt is what happens if lots of people decide, or are forced, to pay it off at the same time.
The trouble is, if you don't risk anything, you risk even more.
As borrowers, we may feel guilty about running up debt, anxious about making payments, and resentful of the constraints that old obligations (and old credit records) impose on our current choices. We may find it too easy to buy things we may later regret.
Main Street investors, who cannot trade credit default swaps, should not be tempted to trade an instrument with the same risk profile simply because it has been given a different name.
There are so many opportunities that I could've gotten before if I had just took a little more of a risk.
Often you need to take some risk, but it must be a realistic risk, you can't take a crazy risk.
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