Wednesday, May 11, 2005

Credit Default Swap (CDS)

When the bubble finally bursts, the media will inevitably lay the blame on some sort of catch-all culprit for bringing about the demise of so many hedge funds and banks. I expect much of the blame will be placed on “derivatives” but in particular, credit default swaps, or CDS. A CDS is simply a derivative security that protects bondholders from much of the risk that a bond they own will default. Ideally these are hedging instruments and are bought in conjunction with a bond. There are rumors though that these hedging securities are not being used correctly and that a hedge fund blow-up is imminent.

In either case, when the 7:00 news starts talking about Credit Default Swaps, you can always say you read it here first.


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