A trader who purchased a swap on GM for $1 million could potentially sell the swap to another trader later on for, say, $2 million, simply on the perception that GM’s fate had worsened. At the end of the day, it was all very simple: traders were betting on a level, just like a stock. If the company looked shaky, the CDS cost would rise. In theory, hundreds of swaps, or more, can be written on a single bond. More commonly, swaps are written on baskets of hundreds or thousands of bonds and on other kinds of loans. They could metastasize without end—and did—reaching a value of more than $60
...more
