Default swaps in essence grant an option on default to the buyer of protection.
ECONOMIST: Credit derivatives
If the protection-buyer does not have the securities, he must buy them in the market.
But on September 7th came a bleak announcement: Moulinex-Brandt had suspended payments to creditors and been placed under six months' court protection while a buyer is sought.
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So while it is useful on many levels, a warranty is an imperfect form of protection for both you and the buyer.
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While this is true, put options can also provide protection against additional declines in stocks that the put buyer owns.
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