On Wed, Sep 17, 2008 at 8:43 AM, Michael Perelman
<michael@xxxxxxxxxxxxxxxxx> wrote:
Suppose somebody wants to make a bet with me that the San Francisco 49ers will win
the next two Super Bowls. He gives me $100 today, and I have to give him $100
million in case he.s right. The chances of this happening are very small, but just in
case the impossible happens I want some backup. I buy insurance from my next-door
neighbor. I offer to give him a nickel every week in return for his promise to cover
my bet.
Perhaps one more step is necessary to make this work: you and your neighbor have to come up with some fancy mathematical models to convince the rating cos to give you AAA ratings, so the insurance you sold can be accounted for as a solid asset on other people's books. I guess that step is necessary to make sure ordinary people can't get in on the scam and it is reserved for "sophisticated" financial institutions.
-raghu.
--
"I have a heart of a child... in a jar on my desk." - Stephen King