A holder of a bond may “buy protection” to hedge its risk of default. In this way, a CDS is similar to credit insurance, although CDS are not subject to regulations governing traditional insurance. Also, investors can buy and sell protection without owning debt of the reference entity. These “naked credit default swaps” allow traders to speculate on the creditworthiness of reference entities. CDSs can be used to create synthetic long and short positions in the reference entity.[7] Naked CDS constitute most of the market in CDS.[13][14] In addition, CDSs can also be used in capital structure arbitrage.
Top Ten Things Overheard At The ANSI C Draft Committee Meetings: (5) All right, who's the wiseguy who stuck this trigraph stuff in here?