Credit Default Swap

The outbreak and spread of the financial crisis of 2007-2008 have caused the most of countries into severe economic difficulties and also created an adverse impact on the global economy. The beginning of the financial crisis is defaults in the subprime mortgage market in the USA. Although the global economy seems to recover since 2009, the impacts of the crisis still affect many countries until now. This essay focuses on the background and impacts of financial crisis, and the learning from the movie The Big Short.

CDs require a minimum amount of money to invest. CDs are safe ways to save money but it is hard to get the money out. Bank will charge a fee if money is taken out early. Generally ranges from

In 2008, the world experienced a tremendous financial crisis which rooted from the U.S housing market; moreover, it is considered by many economists as one of the worst recession since the Great Depression in 1930s. After posing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It brought governments down, ruined economies, crumble financial corporations and impoverish individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brother and AIG. These collapses not only influence own countries but also international area. Hence, the intervention of governments by changing and

At the end of one of the best drama movies, or movies in general, The Big Short, the producers made a shocking cite: "Bespoke Tranche Opportunity, which, according to Bloomberg, is just another name for CDO." (Carlozo) The name CDO is like a frightening alarm that goes off when everyone who understands it sees it on screen in movie theaters. Only less than a decade ago, the American housing and banking market completely collapsed because of fraud and greed of major banks and rating agencies. People at Wall Street were arrogant and made the market unintelligible to average persons. The outcome? I think that was a time we will never forget. Bespoke Tranche Opportunity is indeed fairly similar to CDOs, and is indeed likely to cause the market to completely collapse, but we might be able prevent this with careful regulations.

The Global Financial Crisis or 2008 financial crisis is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s. It resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world.

CDSs are used as an insurance against the possibility that the borrower could not repay his or her loan. In such case the issuer has to pay a specified sum to the buyer. Of course they are sold for a premium and if no credit events occur, the issuer makes profit. After the subprime mortgage crisis began, and many borrowers started defaulting on their loans, the pressure on the companies that had issued CDSs was rising. There were companies that simply did not have enough money to repay everything they owed. A famous example is AIG. The subprime mortgage crisis and the bankruptcy of big financial companies, like Lehman Brothers, meant that AIG had to pay much more money that it expected and made the company insolvent. The company itself had AAA rating shortly before this. This made the investors confident that even their high-rating investments failed, the insurer would certainly be able to repay them. A bailout from the US government followed. Generally, the issuers of these instruments can be held accountable for issuing them, without the ability to pay what they had to, when the credit events occurred. Of course many of them were mislead by the credit rating agencies and the overall conviction in the market that it was not as risky as it actually was. Many people argue that such instruments need to be regulated much better. They can create clear conflict of interests. For example, a

The 2008 global financial crisis caused by the US mortgages market and extended to the whole world. Some banks and companies has forced to bankruptcy in this accident and some layoff employees, which increased the unemployment percentage, decreased the wealth and income of consumers and lowered the demand of products, so that the companies would layoff more employees, which becomed a vicious cycle. The accident affect not only the financial industry, but also other industries. After the accident happened, governments released polices to contain it, such as the Dodd-Frank Act. Different countries has fall into recessions in different

Cds can be issued to people, enterprises, trusts, assets and affiliations. NRIs can likewise subscribe to CDs, yet on non-repairable premise as it were. In auxiliary market such CDs can't be embraced to another NRI. They are issued at a rebate rate openly dictated by the backer and the market/financial specialists. Compact discs are issued in divisions of Rs.1 Lac and in the products of Rs. 1 Lac from that point. Advances can't be allowed against CDs and Banks/FIs can't purchase back their own CDs before development.

Collateralized Mortgage Obligation also known as CMO is a structure that is based on risk. The first CMO was in 1983 for Freddie Mac was by Salomon Brothers and First Boston (banks). According to the Investopedia, “A collateralized mortgage obligation is a special purpose entity that receives the mortgage repayments and owns the mortgages it receives cash flows from (called a pool). The mortgages serve as collateral, and are organized into classes based on their risk profile. Income received from the mortgages is passed to investors based on a predetermined set of rules, and investors receive money based on the specific slice of mortgages invested in (called a tranche).” Tranches are created when mortgage loans from an institution such as

On September 15th 2008 the collapse of the Lehman brothers filed for bankruptcy. The filing was the largest in history with $619 billion in debt. This involved a huge reduction in the availability of credit, pushing the economy into recession. America lost 5.4m jobs from September 2008 to April 2009 causing the collapse of inter-bank lending creating a global crisis. The credit crunch in 2008 became into the worst recession in 80 years bringing down the world’s financial system. High risk loans were lent to those who could not afford to pay their debts back.

Mortgage backed securities and credit default swaps are words we often hear in reference to the Great Recession of 2008. In this paper, I will be discussing and analyzing an analogy Tim Harford uses to discuss the probability of buying a carton of eggs with an egg having a double-yolk to what mortgage-backed securities and credit-default swaps meant and represented.

The global financial crisis of 2008 shook the pillars of economic institutes of nations all over the world including Canada. The crisis caused the financial meltdown of various global financial organizations such as the Lehman Brothers brought the US economy to its knees with matters being exacerbated by the burst of the sub-prime mortgage bubble. Financial markets including various banks went into bankruptcy with governments having to chalk out large bailout packages and the reserve parachute of financial reforms and regulations to stop the free fall of financial institutions.

Collateralised Debt Obligations, short for CDOs, is an important part of asset securitisation. CDOs provided more liquidity in the economy which was a popular financial innovation. It is an innovative financial product that repackages different debts into a new portfolio. In CDOs, investment bank gathered a series of assets from the fixed-income market, such as mortgage-backed securities, credit-default swaps, and high-yield bonds. Once the CDO has created by the investment bank, it would distribute the cash flows from those mentioned assets to investors in the CDO. CDOs pool all the cash flows from its collection of assets together and divided into rated tranches or slices, in order to satisfy the needs of different risk preferences of investors. Suppose there are three basic tranches, safe, good enough and risky. When money comes in, the top one will be filled in first. It

The CDS does not require buyers to actually hold underlying assets. That means a third party can “insure” against default risk that it would not bear the consequence at the first place. A financial institution can act like an insurance company by selling CDSs. American International Group (AIG) was the largest CDS underwriter during the crisis. AIG issued tons of CDSs because historical default rate on bonds were so low that issuing CDS became a cash generator. They simply collected the premium and never though of paying out anything until the crisis hit.

Risks faced by financial institutions (both conventional and Islamic financial institutions) in the operations that they perform are of different nature and types: exchange rate risk, trade risk (or market risk), political risks, risks that represent changes in the value of assets and good, etc. Credit risk is deemed to be the most significant type of risk which is faced by financial institutions and in their relationship with the owners of wealth. Credit risk relates to the debtor’s ability to repay the debt at the specified time, and in accordance with the conditions stipulated in the contract signed and agreed upon to. The debtor’s inability to abide by his obligations will lead to a loss, breach of contract and therefore will become a risk for the institution.