Financial Risk Manager Part 1
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Credit derivatives played a significant role in the 2007/2009 financial crisis. Which of the following statements is correct regarding credit derivatives in the context of 2007/2009 financial crisis?
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TTanishq
A
Credit derivatives were solely responsible for causing the financial crisis.
B
Credit derivatives were completely withdrawn from the market after the crisis.
C
The blame for the crisis was solely on the use of credit derivatives and not the instruments themselves.
D
Complex credit derivatives like CDOs-squared and single-tranche CDOs were revived after the crisis.
Explanation:
Credit derivatives, such as credit default swaps (CDS) and collateralized debt obligations (CDOs), received significant blame for the financial crisis, but the problem was not the instruments themselves but how they were used. The crisis resulted from the misuse and mismanagement of these instruments.
Choice A is incorrect. Credit derivatives were a contributing factor, but they were not the sole cause of the financial crisis.
Choice B is incorrect. While some credit derivatives declined in popularity or faced increased scrutiny after the crisis, others, like credit default swaps (CDS) and collateralized loan obligations (CLOs), continued to be used in the financial markets.
Choice D is incorrect. Very complex instruments like collateralized debt obligations squared (CDOs-squared) are unlikely to be revived.
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