There is no scientific basis for the construction of a derivative with any precision, the purpose for them is clearly to generate fees and huge profits for Investment Banks.
The financial industry has a long history of applying mathematical models that are valid for physics to create the fairy tales known as Modern Portfolio Theory and Efficient Market Theory.
You are correct that many variables are used, but most are estimated and locked down in unrealistic ways that invalidate the approach.
I just have one question: Is it possible to hedge the spot value of the CDS today against a future value? Thereby insuring the principal debt obligation to the counter party(minus interest payments)...? Otherwise the whole transaction would implode on itself right?..just like the subprime market....I'm really confused here
In other words, they are bets and there is an inherit conflict of interest if you are betting that an entity will fail.
ibislee 8 months ago
Hi, kanjoh! Just want to say thank you sooo much for making all these videos. THey are very clear and helpful. God bless you!
humpsato10 1 year ago
so true! MPT would imply ALL mutual funds hold only ONE "optimal" portfolio!....a far cry from venal reality built on stuffing and fees!
take CDS: the probability of default goes UP as the number of contracts outstanding!! try modelling that circular valuation!
Finance is NOT a science. but shhhhh....don't tell Madoff investors!!!!
kalm77 1 year ago
There is no scientific basis for the construction of a derivative with any precision, the purpose for them is clearly to generate fees and huge profits for Investment Banks.
The financial industry has a long history of applying mathematical models that are valid for physics to create the fairy tales known as Modern Portfolio Theory and Efficient Market Theory.
You are correct that many variables are used, but most are estimated and locked down in unrealistic ways that invalidate the approach.
jstafura 2 years ago
you helped some but I am still scratchin me head. It seems like it is complex for a reason.
PhantomMaster101 2 years ago
Nice vid.
I just have one question: Is it possible to hedge the spot value of the CDS today against a future value? Thereby insuring the principal debt obligation to the counter party(minus interest payments)...? Otherwise the whole transaction would implode on itself right?..just like the subprime market....I'm really confused here
Thanks
karabop3000 2 years ago