Posts Tagged ‘credit default swaps’

Wall Street, The Love (Hate) Affair With Credit Default Swaps, And The Case Of The Misguided Model

Monday, August 5th, 2013

By Martin Kidd

Martin Kidd is Managing Director of Embiggen Finance and is completing a Master of Business (Applied Finance) at Queensland University of Technology

Imagine yourself sitting at a dinner party, where everybody has interesting anecdotes and now it’s your turn to tell a story. You’re a derivatives trader, and you know that if you start talking about work, everyone’s eyes will glaze over because there is approximately zero genuine interest in whatever it is you actually do for a living. Unless you’ve allegedly played a part in the 2007 credit crisis, that is. Credit default swaps have had a bit of a hard time in the finance media since the peak of the financial crisis, so perhaps it’s about time we explored the journey they’ve had since conception through to what’s happening in the market today.

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And you thought Frankenstein was scary: The rise of credit derivatives

Thursday, November 22nd, 2012

by Shane Murray
The monster Frankenstein was scary; there are no two ways about it. Regardless, the creature was created with all good intents, but confused and conflicted he desired nothing more than to see the life of his creator ended. Comparably, it seems credit derivatives are not too dissimilar. Created by the financial sector as a credit risk mitigant some 15 years ago, misunderstanding around their fair value coupled with their exponential growth has left the finance sector in a state of near ruin! Now you might ask, how did something as simple as a collection of swaps prompt the Global Financial Crisis (GFC)? Well it seems these humble swaps are more intricate than their name suggests. While the cash flows between counterparties can be assimilated to those of a tradition swap, the real payday comes after a credit event when the ‘swap’ more so resembles an insurance product. But don’t tell the regulator! In a market where the lenders are reaping the rewards of highly-leveraged seemingly de-risked positions, and the protection-sellers are happily watching the premiums accumulate, why concede to restrictive governance? Particularly, when considering the genius of the creator. But it seems the smarts are not all there, as the coming together of deficient credit modelling; moral hazards; and the unravelling of the sub-prime market, generated the very bolt of lightning needed to awaken the sleeping monster, which brought the thriving financial sector to its knees.

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