Synthetically Long Position with Credit Default Swap (CDS)

[yoda1228]

Here kids, is a great recipe for an economic meltdown! So what happens when multiple banks, banks that have re-leveraged their assets to unsustainable levels, purchase CDSs and then they all go bust and then AIG can't pay them because they don't have the funds to do so? You sound like a nice guy but by preaching this garbage you are perpetuating the insanity and dysfunctional practices that got us, well , maybe not you if you are in the 1%, into such hard times.

[bionicturtledotcom]

@yoda1228 What happens? the shit hits the fan, good people are hurt ... endless ripples ... some people become so upset they forget the difference between descriptive (what the hell is this?) and normative (what should we think about it?)... youtube comments ensue

[lostindeforest]

Does this example leave out the funding risk associated with the synthetic bond or am I missing something? Don't you still have to raise cash to purchase the treasury or are you saying the CDS premium covers that?

I'm sitting for the Level III exam this June and have used your videos at each level, keep up the good work!

[raghu007nair]

The last part of the video says pure credit risk.......but neglects to mention the counter party risk assumed in the transaction

[bionicturtledotcom]

@raghu007nair good point, i totally agree (I recorded this 2.5 years ago, it's funny b/c today i would never imagine to omit the counterparty risk) ... thank you for pointing out a key risk