Credit Default Swaps (CDS)?

Another one to be understood properly in this sort of mindset in the world.

Credit Default Swaps


63 Trillion Dollars worth of insuarence contracts (CDS) were in existance in the world in 2003 but falling to $26.3 trillion by mid-year 2010. And at the end of 2011 the amount is $ 32,409 billion according to the Bank of International Settlements.

Some people have made fortunes out of CDS's. CDS originated from the idea of someone taking an insuarence policy with the bank, to make the money he lent, to someone, is safe. When the economy is boomimg the banks made a lot of money, but now lots of companies are going bust the banks are losing money in a rabid state.

Simplify further, if a company "C" wants to enlarge, "C" goes to an investor "I" and gives "I" corporate bonds or IOU's to get the money. Then "I" wants to be sure that his money is safe, "I" goes to a bank "B" and takes a CDS as insuarence. "B" promise "I" to pay the amount in IOU's if the company goes bust. Nice and easy way the financial markets to go on their jobs. Hang on there is a catch, as usual, and incomes the speculator who do not as "B"  involve in the "C"'s stock, but buys the CDS's waiting for the"C"to go bust. When "C" goes upsy downsy the bankcrupcy costs go through the roof. So lots of people can take the CDS's for the same event like in the bookies.

THe biggest players in UK for this cds's were RBS and Barclays to the tune of 2.4 trillion each. That is if all cds's are called at the same time, which is unlikely one might say but when the credit crunch hapened, is that exactly what happened. The media said at that time the UK gov is worried about people taking their money out en masse and there won't be any money. Hmmmmm.
 
 
 
 
 

I am a selfish person. If you cannot find the links in this blog, I have majority of them filed, Email me!

Derivatives?

Comments welcome even the briefest thank you.


I have been very annoyed when people in TV talk about Derivatives. They expect us to know this term. May be I am slow. I think now I understand it as a bet. Wikipedia defines it as:

A derivative instrument is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs, are to be made between the parties.^[

Investopedia describes it as:

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Now I am geting a wee bit of understanding about this very elusive subject ( as many people seems to lose and win).

Joshep B Dahl from World Group Mortgage, LLC says

Derivates involve the trading of rights or obligations based on an underlying product, without necessarily directly transfering that underlying product

Still confusing or what may I ask?

OK now imagine a horse race I who takes a bet on the race is the buyer and the Race Tract is the seller. . After the transaction the seller is obliged to pay the buyer a certain amount according to the odds specified. These odds are called the underlying variables depending on the amount of money the Tract gets from the amount of money paid as bets.

Similarly a farmer can sell next years crop at a cetain amount of money to a bank, hedgefund etc. If the per unit price agreed drops bank loses that amount. If the price goes up the bank wins. Farmer vice a versa.

Further more, If I know someone is going to burn down his house, by using cadles only, I can take an insuarence policy to say that the house will be burnt down in a specific time. But I cannot take insuarence policies on another person or someone else's property. Then again a derivative can be arranged onsome elese company, a bank, a deal or another derivative. but this system is not regulated anywhere in the world, though it is legal in almost all top dog world.

I am a selfish person. If you cannot find the links in this blog, I have majority of them filed, Email me!More and more I dive into this more it gets confusing. Gosh.