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Mbb20
This document discusses various financial innovations and risks related to money, banking, and business. It covers topics like hedging credit, interest rate, liquidity, and currency risks. Specific innovations mentioned include collateralized debt obligations which package loans into securities to improve liquidity, and derivatives like CDOs and currency forwards which allow betting on or locking in future rates and defaults. Examples of famous financial scams and criminals are also listed. Overall the document seems to be covering different financial products and how risks are traded or hedged in innovative new ways.
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Mbb20
- 2. Money, Banking, and Business Lecture20 Financial Innovation Chapter 10
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- 4. Hedging Risks Credit Risk InterestRate Risk Liquidity Risk Currency Risk
- 5. Liquidity Risk Convert illiquidlong- term loans into short-term liquid securities
- 6. Collateralized Debt Obligations Combine andslice into small bites Make liquid
- 7. Individual Mortgages Package as a Security Share in the Security $200,000$200,000 $200,000 $200,000 $200,000 $1,000,000 $20,000 Each 50 $1,000,000 8.0% 7.0% $80,000 $70,000 Potential Profit $10,000 Only $64,000 Short $6,000
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- 10. CDO Derivatives Betting onDefaults Free money if no default Catastrophe
- 11. CDO Derivatives You don’thave to play to game to make money not the game.
- 12. $5.1 Billion no individualbankers have been charged with wrong doing. $13.0 Billion $16.6 Billion $7.0 Billion $3.2 Billion Department of Justice - Settlements
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- 18. Currency Risk Forward Agreement Lockthe exchange rate today for a future date
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- 20. Exchange Rates Change ? TodayTomorrow Lock the future rate
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- 23. Lost 25% in twoyears What expect in next two years? Will someone take that risk for me?
- 24. Hedging Not eliminating risk Tradingrisk New ways every day
- 25. Hedging - TradingRisks Credit Risk Interest Rate Risk Liquidity Risk Currency Risk
- 26. Hedging - TradingRisks Do you want to take the risk or sell the risk?
- 27. Loan Rate Pricing Addup all the risk factors Minimum