Are CDOs and CDSs derivatives?
Yeah sorry. CDO – Collateralised Debt Obligation They are basically a complex amalgamation of parts of mortgage backed securities (MBS). MBSs are home loans that have been transformed into financial products so the original home loaner is able to sell them to others. So CDOs are derivatives of home loans. They are very hard to accurately value because of how complex they are. CDS – Credit Default Swap Are basically an insurance product that people giving credit (ie the buyers of CDOs or MBSs) can purchase. The seller of the CDS offers to pay the value (or part of the value) of the credit if borrower defaults. So they are a derivative of the credit product that they are insuring. These presented major problems because they actually concentrated the risk of home loan defaults rather than dissipating it. After AIG had sold all of these CDSs and heaps of people defaulted on their mortgages, AIG could not afford to pay all the ‘insurance’ they had sold and went broke. Then all the people wh
