Access over 20 million homework & study documents

Discussion Questions

Content type
User Generated
Subject
Business
School
University Of Massachusetts Boston
Type
Homework
Rating
Showing Page:
1/8
Running Head: DISCUSSION QUESTIONS 1
Title: Discussion Questions
Student's name:
Course title:

Sign up to view the full document!

lock_open Sign Up
Showing Page:
2/8
DISCUSSION QUESTIONS 2
Discussion Questions
1. A survey by Fitch Ratings found that capital market participants felt that Credit
Default Swaps, a form of derivative contract that pays off if the named “underlie”
defaults on its debt obligations, are both more important as indicators of counterparty
risk and a more important tool for managing counterparty risk than are other means,
such as stock prices or credit ratings. Please comment and discuss. For example, what
advantages or disadvantages of market-based indicators for making investment (bonds,
loans, stock) decisions?
Credit Default Swaps are good as they allow the creditors to buy some protection against an
unlikely event of debt default. Thus the creditor will pay some periodic payments to the
seller. Swaps guard the lender against the credit risk. Thus bond buyers are enabled to fund
ventures that are riskier. Another reason why swaps are good indicators is because swaps
help in protecting the companies as they encourage diversification (Stulz, 2010). Thus
companies have fees from other companies or other industries in case there is some defaults.
Thus swaps help in ensuring that there is some steady flow of payments with very little
downside risk. To ensure that the method works, a regulator is needed. This is because swaps
can give a false sense of security when the parties did not have the full amount needed to
insure. Thus when there is defaulting, it is very risky (Stulz, 2010). Thus they can give a false
hope and make people to get riskier debts hoping the swaps will guard them.
Market based indicators are used to make investment decisions and some people prefer them
to accounting based indicators. One advantage of them is that they give a very near to real
time outlook of the situation as the market prices are very quick to reflect the expectations of

Sign up to view the full document!

lock_open Sign Up
Showing Page:
3/8

Sign up to view the full document!

lock_open Sign Up
End of Preview - Want to read all 8 pages?
Access Now
Unformatted Attachment Preview
Running Head: DISCUSSION QUESTIONS Title: Discussion Questions Student's name: Course title: 1 DISCUSSION QUESTIONS 2 Discussion Questions 1. A survey by Fitch Ratings found that capital market participants felt that Credit Default Swaps, a form of derivative contract that pays off if the named “underlie” defaults on its debt obligations, are both more important as indicators of counterparty risk and a more important tool for managing counterparty risk than are other means, such as stock prices or credit ratings. Please comment and discuss. For example, what advantages or disadvantages of market-based indicators for making investment (bonds, loans, stock) decisions? Credit Default Swaps are good as they allow the creditors to buy some protection against an unlikely event of debt default. Thus the creditor will pay some periodic payments to the seller. Swaps guard the lender against the credit risk. Thus bond buyers are enabled to fund ventures that are riskier. Another reason why swaps are good indicators is because swaps help in protecting the companies as they encourage diversification (Stulz, 2010). Thus companies have fees from other companies or other industries in case there is some defaults. Thus swaps help in ensuring that there is some steady flow of payments with very little downside risk. To ensure that the method works, a regulator is needed. This is because swaps can give a false sense of security when the parties did not have the full amount needed ...
Purchase document to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Anonymous
I was having a hard time with this subject, and this was a great help.

Studypool
4.7
Indeed
4.5
Sitejabber
4.4

Similar Documents