Credit Default Insurance

Your friend lives in a garage somewhere near Baltimore. That would be a pretty good indicator that he isn’t very good with his money and finance. However, he is trying very hard to improve his financial lot, so he reaches out with an idea. He wants to bet you 10-to-1 odds that the Baltimore Orioles will win the World Series next year.

He wants to put up $1,000, which means you’d owe him $10,000 if the Orioles were to win. But since they're the Orioles, you can safely take this bet and know that this terrible baseball team isn’t going to get out of the Wild Card round of the playoffs.

However, you’re worried that your friend who lives in a garage won’t be able to pay you back when the Orioles lose. So, you reach out to someone and ask them to secure this debt. You’re asking for insurance from your friend’s debt.

Now, that product doesn’t exist on gambling debt. But on a large commercial mortgage, for example, a lender might want to reduce the chance of losing a $1 million loan by purchasing credit default insurance. They will pay a third-party premium to ensure that the other firm pays off the loan if the borrower defaults.

Credit default insurance agreements are typically default swaps, return swaps, or any other guarantee that frees the lender from the risk, and ensures they will still receive payment should that borrow default.

Let's play ball.