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Reply #7: Worst part is that the issuers will sell short the bonds to hedge
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HamdenRice
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Wed Dec-10-08 03:14 PM
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7. Worst part is that the issuers will sell short the bonds to hedge |
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Since cds issuers don't accumulate reserves, the only way for them to protect themselves against exposure to paying off as insurers is dynamic hedging -- a polite term for selling short on the reference security.
That means that the very act of issuing a cds insurance against default makes the default more likely to happen.
This practice should be banned immediately.
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