January 2012
Intermediate to advanced
384 pages
8h 36m
English
Content preview from Tail Risk Killers: How Math, Indeterminacy, and Hubris Distort MarketsBecome an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
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CHAPTER 30Twilight of the Models
There is nothing inherently destabilizing about a single credit-default swap (CDS). You are either in the money or out of the money: One side loses, and the other wins. This means that these derivatives transfer risk, not create it. What creates systemic risk is bad pricing, selective margining, and lack of netting, not the instruments themselves. A clearinghouse facilitates transparent pricing, netting, and straightforward settlement with fewer collateral squeezes.
So what’s the problem? Many people think that Satan himself unleashed CDS on the world.
CDS AND INNOVATION
It is sometimes said that the sheer size of the CDS market is destabilizing in itself. Those gargantuan notional amounts are ambiguous, though. ...
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