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Similarly, why would anyone buy credit default swaps for companies with low chance of defaulting?

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Because the price is right. If you think a company has an 80% chance of defaulting but you can sell a credit default swap for 85 cents on the dollar, then you’ll do it. Similarly, if you think a company has a 2% chance of defaulting but you can buy a credit default swap for 1 cent on the dollar, then you’ll do it. The markets set the price at a level where there are both buyers and sellers.

  • sorry but what do you mean by "85 cents on the dollar"? is the dollar referring to the amount that will be covered by the insurance? – kchoi Jan 20 at 20:13

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