Credit default swap was invented by a team working for JP Morgan Chase. It was designed to counter the risk of debt being irrecoverable (Choudhry, 8). It was introduced in the year 2000. It acts as an insurance policy. It acts as a contract between a bank and the organization. The buyers and sellers insure the recovery of their payments through a bank. The organization which buys this contracts makes periodic payments to the bank and if recovers their payments in case of any bad debt.
It plays a vital role in the times of recession because all organizations are not stable and anyone might get bankrupt creating bad debts. Collateralized debt obligations It is another recovery system. It was introduced in 1987. It offered returns up to 2 to 3 percent more than any other corporate agreements or contracts (Redondo, 3). It is a type of security of which value is determined by the value of the assets which have a fixed income.
These assets cannot be individually sold; therefore they are sold in packages for cash. It has been reliable in the recent crunch and is being admired by analysts and investors. The risk in these CDOs is divided into
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The prices of the assets reduced to minimal levels so much so that the organizations did not wanted to mark their assets at those prices because that would have negative impact on their statements of financial positions showing them as insolvent. When the value of assets falls drastically, these assets are termed as “Toxic Assets” in the market(Anson,22). Works Cited A Book Choudry,L. The basis of credit default swap. Manchester: Bloomberg. (October 2007). Redondo, S. Understanding Collateralized debt obligations. Paris: AG Verlag. (March 2007). Anson,J. Alternative assets. New York:Waley. (September 2008).