ECON350 Lecture Notes - Lecture 11: Credit Default Swap, Qantas, Currency Swap
Document Summary
Topic 8: derivative & option market (hedge against risk, platform to make profit, speculative purpose) Basics: financial derivatives get their name from the fact that their value is (cid:858)de(cid:396)i(cid:448)ed(cid:859) f(cid:396)o(cid:373) the movement in an underlying security or event. Buy derivative to hedge the weather risk: amongst other things, this means there is almost no limit to their creation. Promises to pay is 10 times of the physical asset, affect the economy when crisis occur: but the(cid:374) it got (cid:272)a(cid:396)(cid:396)ied a(cid:449)a(cid:455). I(cid:374) the de(cid:272)ade to (cid:1006)(cid:1004)(cid:1004)(cid:1011), (cid:858)o(cid:448)e(cid:396) the (cid:272)ou(cid:374)te(cid:396)(cid:859) de(cid:396)i(cid:448)ati(cid:448)es alo(cid:374)e grew ten-fold with trn bought and sold in that year. Prior to the gfc, there was much belief in the idea that derivatives could banish risk itself. risk can be reduce for one party and increase for another party, risk is transfer but not eliminated completely. Instead so(cid:373)e of the(cid:373) (cid:271)e(cid:272)a(cid:373)e, i(cid:374) the e(cid:448)o(cid:272)ati(cid:448)e (cid:449)o(cid:396)ds of wa(cid:396)(cid:396)e(cid:374) buffet, (cid:858)financial weapons of mass destruction(cid:859).
