Derivatives Market
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Discuss why derivative markets are better suited to control some risks (commodity price changes, natural disasters) than other financial or insurance markets. For instance why did active derivative markets develop for catastrophe insurance and credit default swaps? Why might derivative markets prove ineffective? For example, what went wrong with the market for credit default swaps?
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Solution Summary
The solution determines why derivative markets are better suited to control some risks than other financial or insurance markets.
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Credit derivatives, as tools in enhancing returns and managing risks, have been growing in prominence as well as size in the derivatives market. Credit default swaps or CDS, according to Spentzos (2008), are the "building blocks in the credit derivatives market and represent half of its volume" (p. 314). In a CDS, the protection buyer or ...
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