Main Street investors, who cannot trade credit default swaps, should not be tempted to trade an instrument with the same risk profile simply because it has been given a different name.
Sentiment: NEGATIVE
Credit-default swaps remedied the problem of open-ended risk for me. If I bought a credit-default swap, my downside was defined and certain, and the upside was many multiples of it.
Diversifying sufficiently among uncorrelated risks can reduce portfolio risk toward zero. But financial engineers should know that's not true of a portfolio of correlated risks.
Credit default swap is basically just an agreement that I have with you, where I sell you insurance on some bond you own. If the bond goes belly up, I promise to pay you. And as long as the bond doesn't go belly up, you pay me for selling you insurance.
Every form of payment has some risk associated with it.
In the future, financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk-taking.
I wasn't aware I was trading on my good name; I've never had a good name.
Home purchases that are very highly leveraged or unaffordable subject the borrower and lender to a great deal of risk. Moreover, even in a strong economy, unforeseen life events and risks in local real estate markets make highly leveraged borrowers vulnerable.
You want banks to take some risk, but intelligent risk.
The reality is, risk is variable. Those in the financial world know it.
Financial institutions like to call what they do trading. Let's be honest. It's not trading; it's betting.
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