Examples from two presentations I gave in college. One is a slide showing a Monte Carlo simulation that affected my groups investment decision. The other set of slides is from a presentation about credit default swaps I gave.
4. Lack of Regulation No central reporting mechanism to determine their value Banks could hide their credit risk by keeping it off the books in credit default swaps No way to know who holds what from what end
6. Counterparty Risk Condition of R Worsens, premium rises Company A Company B 2% Risk Premium 5% Risk Premium Sells CDS to Company C 1 Company C
7. Counterparty Risk Reference company defaults, Company B has to make good on the contract and pay Company C Company B may not have the assets on hand to cover Company B is depending on payment from Company A If one of the companies fails, “domino effect” occurs
8. Counterparty Risk For example: Company A fails, Company B defaults on its CDS contract to Company C Company B may face bankruptcy and Company C may experience a large loss Company C never even knew it was connected to Company A
9. Future of Credit Default Swaps Increased regulation "We now know this financial crisis and the collapse of key financial institutions owe a great deal to the extensive commerce in credit default swaps and similar contracts.“ – Sen. Harkin Decrease in market size