email at michael.s.gibson@frb.gov. Postal address: Mail Stop 91, 20th and C Streets NW, Washington, DC 20551. Phone: 1-202-452-2495. Fax: 1-202-452-3819. Understanding the Risk of Synthetic CDOs Abstract: Synthetic collateralized debt obligations, or synthetic CDOs, are popular vehicles for trading the credit risk of a portfolio of assets. Following a brief summary of the development of the synthetic CDO market, I draw on recent innovations in modeling to present a pricing model for CDO
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uninteresting to investors but also lower the cost of borrowing money. So investors borrowed a huge amount of money and used “leverage” to make more money. They created a “novel” way to make money by purchasing and selling CDO (collateralized debt obligation). At the beginning, the mortgages were only given to people with good credit records and strong ability of repayment. Everything was good until the occurrence of sub-prime. Include house owners, lenders, bankers and other financial institutes
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A Tale of Two Hedge Funds: Magnetar and Peloton Describe in your own words, Peleton's winning strategy in 2006. Peloton’s winning strategy was effective in 2006 and allowed Peloton Partners to become one of the top hedge funds in the country. Ron Beller, the head of the company bet against the United States housing market. Before the subprime crisis hit the country, and people started to default on their mortgage, Beller was able to earn a healthy return by taking a short position on the housing
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According to Forbes, collateralized debt obligations are “investment-grade security backed by a pool of various other securities that can be made up of any type of debt, in the form of bonds or loans”. This process of “pooling in debt to reduce risk and raise returns” is known as collateralized debt obligation. The process of splitting the debt into different tranches to assign the payment priority and interest rate is known as securitization. Investment banks can buy mortgages and assign them
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TABLE OF CONTENTS CHAPTERS CHAPTER 1 – Abstract 3 CHAPTER 2 – Introduction 4 CHAPTER 3 – Body Paragraphs 4 CHAPTER 4 – Discussion 5 CHAPTER 5 – Conclusion 8 REFERENCES 8 Sub-Prime Mortgage Crisis: What Went Wrong? Abstract: The crisis of subprime mortgages has become a huge problem in the U.S. financial industry in the last few years and has affected the global financial market too. The smaller mortgage companies fell one by one until Bear Stearns also fell; then the
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“The Big Short” Report One of the topics I found most interesting in this book was the differences between the stock market and the bond market that Michael Lewis to some extent explains in the beginning of chapter three. While the stock market was intensely regulated and mostly transparent, the bond market consisted of primarily large institutions and escaped serious regulation. This lack of legislative control played a great part in allowing the credit default swaps on subprime mortgage bonds
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considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations. * A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of long term economic prospects. In India
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No one outside of economists and financial philosophers predicted nor expected a financial crisis during 2008, the same year the Lehman Brothers Holding collapsed. As Americans, we are known to begin pointing fingers as the situation deteriorates and the U.S. State has come to quite a few conclusions as to who is rightfully at fault, although everything that occurs should be considered as a chain cycle rather than specific factors. Three common “narratives” as told to us by the six members of the
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These questions are from the Text Book – Scott, W.R., Financial Accounting Theory – 5th Edition, Person Prentice-Hall, 2009. ISBN: 978-0-13-207286-1. Question 1: From Chapter 4 (Efficient Securities Markets) Question 13. Zhang (2005) examined revenue recognition practices in the software industry. Software firms derive revenue from software licensing and post-contract customer support. In both cases, the point in time when significant risks and rewards of ownership are transferred to the buyer
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a significant role and how ‘the savings glut’ was crucial. Many people believe that wall street were the spark of the crisis and that greedy bankers relied too heavily on toxic financial products such as sub prime bonds, collateralized debt obligations and other derivatives. But these subprime mortgages with exotic features only accounted for less than 5% of new mortgages in the US from 2000 to 2006. Therefore with this in mind, it is highly doubtful that this was the sole claim to the cause of
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