Ever wondered how Credit Default Swaps actually work..?? by stephenkendal

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money · @stephenkendal · Oct 7 '16 (edited)

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Ever wondered how Credit Default Swaps actually work..??

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<h2>CREDIT DEFAULT SWAPS</h2>
<p>Have you ever wondered how Credit Default Swaps actually work..??</p>
<p>Yesterday I did a small piece on Credit Default Swaps titled “Ever wondered what Credit Defaults were..??</p>
<p>Today I would like to explain how Credit Defaults actually work.</p>
<p>Below is a flow diagram of the process.</p>
<p>https://www.steemimg.com/images/2016/10/07/CREDITDEFAULTSWAPS21e19e.png</p>
<p><br></p>
<p>Let’s say if <strong>Corporation A </strong>needs to borrow <strong>$1 billion</strong> but due to it’s Credit Rating it is rated <strong>BB</strong>.</p>
<p><strong>Pension Fund</strong> may be happy to lend <strong>Corporation A</strong> the <strong>$1 billion</strong> but unfortunately can only lend to <strong>AAA Credit Rates Corporations.</strong></p>
<p>If <strong>Pension Fund</strong> is still happy to lend <strong>Corporation A</strong> the <strong>$1 billion</strong> they could take out an Insurance Policy with for a small fee with an <strong>Insurance Company</strong> for <strong>$1 billion</strong> to cover the costs of the loan should <strong>Corporation A </strong>default on the payments.</p>
<p>The <strong>Insurance Company</strong> will charge a &nbsp;fee to the <strong>Pension Fund</strong> of say <strong>1%</strong> of the total <strong>$1 billion</strong> loan made.</p>
<p>Now should the <strong>Pension Fund</strong> have missed something in the due diligence of <strong>Corporation A</strong> and mis-interpreted their Credit worthiness and that <strong>Corporation A</strong> was most likely going to default, a <strong>Hedge Fund</strong> would be able to take out an <strong>Insurance Policy</strong> with either the same <strong>Insurance Company</strong> or a different <strong>Insurance Company</strong> to bet on a default.</p>
<p>What more often happens though is that the side bet made by the <strong>Hedge Fund</strong> is for multiple times the original cover.</p>
<p>In the example above the <strong>Hedge Fund</strong> has taken out a <strong>x10 side bet</strong> on the original loan and has paid <strong>1%</strong> to cover a <strong>$10 billion</strong> claim in the event of a default.</p>
<p>In all cases the <strong>Ratings Agencies</strong> will for a small fee set the <strong>Credit Worthiness</strong> of all parties involved.</p>
<p>Systemic Risk of failure to such an interconnected and complex unregulated environment is highly likely without some form of shared ledger and is why I strongly believe that the future we will see not only <strong>CDSs </strong>and <strong>DERIVATIVES </strong>on the <strong>BLOCKCHAIN</strong>, but all <strong>CREDIT</strong>, <strong>DEBT</strong>, <strong>TRADE</strong>, <strong>CURRENCIES</strong>, to name but a few.</p>
<p>As mentioned yesterday, in the coming days, weeks, months I will continue to share on <strong>STEEMIT </strong>how the adoption of <strong>BLOCKCHAIN </strong>to the complex <strong>DERIVATIVES Market</strong> is important for the stability of the Global Financial System in the future.</p>
<p>This is the sort of thing <strong>STEEMIT </strong>was made for. Cutting edge information that is not only up to date but is not available elsewhere..!!</p>
<p><br></p>
<p>Thanks again for reading and please feel free to share.</p>
<p>Stephen</p>
</html>

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@tocode · Oct 7 '16

Makes sense and explains the derivatives situation really well. This is the kind of content I would like to see on Steemit.

👍 stephenkendal

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@stephenkendal · Oct 7 '16

Thanks I appreciate it. When I first mentioned BLOCKCHAIN DERIVATIVES the middle of 2015 I was met by a barrage of abuse and threats saying it was a totally crazy idea. At the time no one was actually talking about it. I have given many tv/radio/skype interviews on the subject. Give it another 18 months and EVERYONE will be talking about it..!! Thanks for the support and again I appreciate it. Stephen

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@wwworld4us · Oct 7 '16

More! Thank you :)

👍 stephenkendal

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@stephenkendal · Oct 7 '16

Will do one on Collateralized Debt Obligations (CDOs) next if people are interested. Cheers. Stephen

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