3 ms·
I wondered this after watching The Big Short. Here's how I understand it: - Alice estimates that the price of Asset is going to drop from $200 to $100 in one w
by n4r9 8y ago
I wondered this after watching The Big Short. Here's how I understand it:
- Alice estimates that the price of Asset is going to drop from $200 to $100 in one week
- Alice borrows some quantity of Asset from Bob
- Alice sells Asset to Charlie at $190
- After one week, Alice buys Asset from Dave at $100 and returns it to Bob
- travisoneill1 8y agoThat is how you short a publicly traded stock. The mechanics of the shorting in the Big Short is actually a lot different. It is done with credit default swaps which you can basically think of as an insurance policy. The difference is that it is on a financial asset instead of on a physical asset and you also don't need to actually own the asset you are insuring. Like buying insurance on a car you don't own (you can't actually do this). Pay the premiums and if the car crashes you get the value of the car in cash.