Post by ehsanulh125 on Jan 9, 2024 7:12:00 GMT
Excessive risk-taking, herd effect, negative psychological spiral mixed with three-letter (or four) financial products and spiced with loosely supervised markets. We've known since 2007-08 that this is the perfect recipe for a major financial market swing. As Warren Buffet said,financial derivatives can act as weapons of mass destruction. Around 2007-08, one of the best-known such products became the CDS (Credit Default Swap). On the one hand, it got involved in all kinds of complex financial structured products, and on the other hand, it was able to significantly magnify any fluctuations, triggering another panic. As a consequence of this, the market received much stronger regulatory and supervisory control, and CDS was removed from the headlines (of course, the calm decade alone would have predestined it for this).
However, after nearly 10 years, it was again Country Email List on the front page of economic news papers - not regardless of the fact that more turbulent times are coming again. When buying a bond issued by a company, bank or even the state, the investor cannot be sure that the issuer will pay according to the conditions specified in the contract, i.e. the buyer of the bond assumes a credit risk. There can be several tools for managing credit risk, one of which is CDS or credit default swaps, which provide insurance to the investor against losses incurred in the event of default of a bond.
The buyer of the CDS transaction pays a fee to the seller of the CDS - typically an investment bank or financial company - who undertakes to cover the loss (ie, roughly the difference between the face value and the recovery value) arising in the event of default of the given bond, instead of the issuer, to assume the credit risk . The price of CDS is usually given in the market with a premium expressed in basis points. This shows how much of the bond's face value must be paid annually as an insurance premium to cover the risk of default. So the CDS spread reflects the risk perception of insurance providers and investors. The CDS market came into focus when the 2008 crisis unfolded.By this time, a CDS portfolio with a nominal value of nearly 34 thousand billion dollars had been built up.
However, after nearly 10 years, it was again Country Email List on the front page of economic news papers - not regardless of the fact that more turbulent times are coming again. When buying a bond issued by a company, bank or even the state, the investor cannot be sure that the issuer will pay according to the conditions specified in the contract, i.e. the buyer of the bond assumes a credit risk. There can be several tools for managing credit risk, one of which is CDS or credit default swaps, which provide insurance to the investor against losses incurred in the event of default of a bond.
The buyer of the CDS transaction pays a fee to the seller of the CDS - typically an investment bank or financial company - who undertakes to cover the loss (ie, roughly the difference between the face value and the recovery value) arising in the event of default of the given bond, instead of the issuer, to assume the credit risk . The price of CDS is usually given in the market with a premium expressed in basis points. This shows how much of the bond's face value must be paid annually as an insurance premium to cover the risk of default. So the CDS spread reflects the risk perception of insurance providers and investors. The CDS market came into focus when the 2008 crisis unfolded.By this time, a CDS portfolio with a nominal value of nearly 34 thousand billion dollars had been built up.