Understanding The Economics Of Financial Markets

Speculation can, at instances, result in system-wide issues, which is what occurred with the aforementioned credit default swaps in the 2000s. Credit default swaps can be used not solely to hedge towards threat in your individual transaction, but in addition to guess on one other person’s transaction. For example, you’ll be able to wager on someone else’s chances of defaulting on their mortgage. When this gets out of control, in order that hundreds of those “bets” are riding on sure transactions, the consequences of those transactions are multiplied. Thus, when people started defaulting on their poorly-structured mortgages in 2007, their losses have been amplified throughout the market.

Khaterine William

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