Reference no: EM131958871

Question: "Derivatives"

1) Use the Internet to research the role of credit default swaps (CDSs) and other derivatives in the financial collapse of 2008. Examine the derivatives that were involved in the financial collapse of 2008.

2) Speculate on the most likely cause(s) of the collapse. Support your position with one example.

3) Please respond to the following discussion in your own words (no citation needed) Investors and lenders became very reliable on the sub-prime mortgages, collateralize debt obligations, and credit default swaps. Now let's get into the most likely causes of the collapse. It all started with a very low interest rate implemented by Alan Greenspan (1%) and the greed just set in. In his efforts to keep the economy strong Greenspan lowered the borrowing interest rate to 1%, not to mention the surpluses from Japan, China, and the Middle East there was just an abundance of cheap credit. So now borrowing money was much easy for banks and caused them to go a bit crazy with leverage. Leverage is simply borrowing money to enlarge the outcome of an investment deal. This is a great way for the banks to make money but when you connect them with mortgage brokers and homeowners now here come the issues. Just think, in the mid-2000s investors looking for a low risk / high return started throwing money at the U.S housing market looking for a better return on their interest rates. You add unregulated over the counter derivatives, credit default swamps sold as insurance from let's say your AIG or Lehman without money to back them. .

Please use quality research in your internet search. Cite your references.