So you and your friends will do all you can to drive

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default insurance on its debt, the closer you move toward your ultimate goal. So you and your friends will do all you can to drive that cost up and make the world fully aware of it, including buying and selling CDS contracts openly. This makes
Risk Management Lecture Notes - Page 29 of 39the rising cost apparent and you can count on the rating agencies to take notice swiftly. Their downgrade will become thedeath-knell.Therein lies another great problem with Credit Default Swaps. They work exactly like short-selling and rumor-mongering (which CDS owners may well be doing, too) to create self-fulfilling prophecies. They also create the derivative world’s equivalent of margin calls, which mean trouble for luckless parties on what increasingly seem the wrong side of particular bets. Staying in the game takes cash, more and more of it. Such circumstances also invite side-bets — on when the shaky whatsit will fall, for instance. Thus, the money monster grows bigger and bigger. Until it finally pops.Which brings us to the enormous problem of extracting payment from those on the losing side of each bet, who of course didn’t expect to lose. Gamblers never do, until it’s far too late. So welcome to the Casino at the End of the World. Where you’re now backing every remaining wager and paying off the winners. In bailout bucks.
FUTURES AND OPTIONSHistory: Agriculture – farmers and general foods; Today the largest volume are financial instruments
Risk Management Lecture Notes - Page 30 of 39A quick example of margin with copper futures (due in 18months)Today180 Days1lb cu = $11lb cu = $1.10Contract100,000=$100,000$110,000(margin deposit 10%)10,000-90,000you owe 90,00020,000$100,000$110,000(margin deposit 5%)5000-95,000You owe 95,00015,000Euro dollar futures are written on a hypothetical $1,000,000 90-Day deposit of euro dollars (US dollars abroad). Euro dollar prices are stated as an index number calculated as F=100-LIBOR. So if June 2005’s 3-month LIBOR is 3.44% then 100-3.44 = 96.56 is the June 2005 futures price. Now consider96.56-96.46=.10=10 ticks or 10 basis points (BPS)96.56-96.55= .01=1 tick (1/100 of a %)=$25=1 Basis Point (BP)There are 100 full points per each $1 million contract on an annualized basis. Each full point has 100 basis points. The total amount of basis points is100 points * 100 BPS – 10,000 BPS$1,000,000/10,000 BPS = $100 yearly = $25 90-dayThe deposit or margin on a E$(Eurodollar) futures contract is roughly $800. Say you buy a futures at 94.00, when LIBOR is 6.00%. Within a month LIBOR falls to 5.00%T1 94.00 6% (100-6)=94.00T2 95.00 5% (100-5)=95.00You made + 100 ticks or 100 basis points=$25 * 100=$2500 on a $800 InvestmentMAINTENANCE MARGINNow things can go bad as well: If LIBOR went up from 6 to 6.04%, the contracts price would fall to 93.96 and lose 4 ticks=$100. This would be deducted from your margin or deposit, which would now be $700. The margin would be
Risk Management Lecture Notes - Page 31 of 39allowed to fall to a pre-determined limit of $500 (a total of 12 ticks =$300) at which point you would have to bring it up to $800 again.Futures and options contracts can be very profitable (and risky) investments. (Barings : 1 Trader concealed an unhedged $2715).

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