Question: Credit-default swaps provide a means to insure against default risk and require the posting of collateral by buyers and sellers. Explain how these safe-sounding derivative

Credit-default swaps provide a means to insure against default risk and require the posting of collateral by buyers and sellers. Explain how these “safe-sounding” derivative products contributed to the 2007-2009 financial crisis?

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Credit default swaps CDS are traded over the counter and financial institutions do not report their CDS purchases and sales This contributed to a lack of transparency about who bears the default risk making the financial system more vulnerable Recall core principle 3 from chapter 1 information is the basis for decisions Traders could not identify who might have large onesided positions making the system vulnerable to the collapse of one institution ... View full answer

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