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This paper examines the newly created 'CDOs Cubed', which are the first-ever triple derivative, that is, a derivative of a derivative of a derivative. Not surprisingly, CDOs Cubed are often called, 'derivatives on steroids'. Unlike traditional derivatives, which are utilised for risk reduction and/or leveraged speculation, this innovation has created thousands of new investment assets, covering the entire spectrum of risk and return. This paper traces the evolution of this innovation, and examines how this triple derivative is created, structured, and priced.
This paper examines the newly created 'CDOs Cubed', which are the first-ever triple derivative, that is, a derivative of a derivative of a derivative. Not surprisingly, CDOs Cubed are often called, 'derivatives on steroids'. Unlike traditional derivatives, which are utilised for risk reduction and/or leveraged speculation, this innovation has created thousands of new investment assets, covering the entire spectrum of risk and return. This paper traces the evolution of this innovation, and examines how this triple derivative is created, structured, and priced.
Credit Default Swaps (CDSs) are considered as one of the most versatile financial innovations of the 21st century. Since its inception, the credit derivatives market has grown to a peak of $64 trillion in 2008 in terms of gross notional values (Cont, ). However, after the onset of the GFC, this market has decreased to a large extent. While there is evidence that promotes the risk reduction properties of CDSs, there is a growing body of research post GFC that identifies destabilising effects of these instruments. In this paper, I review the relevant scholarly literature and provide evidence of how the views on CDSs have changed post GFC due a deeper investigation of issues such as systemic risk, regulatory arbitrage, information asymmetry and risk‐taking, among others, in the banking industry. This paper provides a survey of the literature of views ‘for’ and ‘against’ the use of CDSs during pre and post GFC periods and finally concludes that in comparison to the pre GFC period, post GFC there is a significant increase in the literature that highlights the detrimental nature of CDSs.
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