Empson ambiguity thesis

Paulson then looked at what buying disaster insurance on mortgages would cost. contracts can sometimes be prohibitively expensive. In the months leading up to General Motors’ recent bankruptcy, for example, a year’s insurance on a million of the carmaker’s bonds sold for eight hundred thousand dollars. If Paulson had to pay anything like that amount, there wouldn’t be much room for error. To his amazement, though, he found that to insure a million dollars of mortgages would cost him just ten thousand dollars—and this was for some of the most dubious and high-risk subprime mortgages. Paulson didn’t even need a general housing-market collapse to make his money. He needed only the most vulnerable of all homeowners to start defaulting. It was a classic asymmetrical trade. If Paulson raised a billion dollars from investors, he could buy a year’s worth of insurance on twelve billion dollars of subprime loans for a hundred and twenty million. That’s an outlay of twelve per cent up front. But, Zuckerman explains,

Empson ambiguity thesis

empson ambiguity thesis

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