Please explain: What exactly is a CDS or “Credit Default Swap”?
"From my understanding, a CDS is a financial product to buy protection against an event of ""default"" (default of payment). Example: if General Motors owes me money $10,000,000 (because I own GM bonds for example) and I wish to protect myself against the event of GM not repaying the money they owe me (event called ""credit default""), I pay FinancialCompany_X (the seller of the CDS) perhaps $250,000 per year against the promise that FinancialCompany_X will pay me in case GM is not paying me. This way I protected myself against that risk. FinancialCompany_X took the risk (against money). A CDS is in fact an insurance. Except they don't call it an insurance which enabled the financial industry to avoid the regulation that applies to insurances. There is a lot of infos here: http://en.wikipedia.org/wiki/Credit_default_swap" "A Credit Default Swap (CDS) is a contract between two parties. A useful analogy is insurance (but by no means exact).  I pay a quarterly premium in order to insure myself against another event.  In this case, it might be that I own some IBM Bonds.  I am happy to own those bonds, and like the ""coupon"" that they pay me.  But I am a little worried about IBM going bankrupt.  So I can find someone willing to sell me a CDS.  So long as I keep up my ""premium"" payments, if IBM goes into default on their bonds, I get a payout. This analogy does break down at a couple of levels.  Firstly there is no requirement that I have to own the IBM bond in the first place.  I can in effect then ""take a view"" on IBM going into default by purchasing a CDS without owning the underlying asset. Also in the real insurance world, there are various capital requirements that the companies have to adhere to, while CDS market, being essentially unregulated has none. So to summarize, and while The Pedia has a pretty good article, they are good both to hedge your bet (i.e. protect your actual owned asset) or as a speculative tool to take a ""view"" on the likelihood of a company to go bankrupt." A Credit Default Swap is a derivative, a financial contract with a value dependent upon another asset. A CDS, in essence, is exactly what it sounds like a swap upon default. The typical arrangement is that a holder of non-risk free credit enters into an arrangement with a counterparty to pay the counterparty a portion of the income received from the non-risk free credit in exchange for being able to force the counterparty to deliver risk free credit if the non-risk free credit defaults. Banks use this mechanism to reduce the risk of the loans they produce while packaging them to be resold to investors.  Banks will typically buy CDSes on mortgages and corporate bonds, paying part of the income from interest payments received, to have the right to force counterparties, typically hedge funds and insurance companies, to swap national Treasuries upon the event that the mortgages or corporates default.  The banks receive less income yet are able to take on more inventory to sell to investors so that more loans can be made to borrowers, households and corporations. Hedge funds typically take on more complex arrangements while insurance companies sell CDSes because they are usually overflowing with risk-free assets yet are starved for income.
The Art of Short Selling by Kathryn Stanley providers for many case studies about what kind of opportunities to look for from a fundamental analysis perspective. Typically things you can look for are financing terms that are not very favorable (expensive interest payments) as well as other constrictions on cash flow, arbitrary decisions by management (poor management), and dilution that doesn't make sense (usually another product of poor management). From a quantitative analysis perspective, you can gain insight by looking at the credit default swap rate history, if the company is listed in that market. The things that affect a CDS spread are different than what immediately affects share prices. Some market participants trade DOOMs over Credit Default Swaps, when they are betting on a company's insolvency. But looking at large trades in the options market isn't indicative of anything on its own, but you can use that information to help confirm your opinion. You can certainly jump on a trend using bad headlines, but typically by the time it is headline news, the majority of the downward move in the share price has already happened, or the stock opened lower because the news came outside of market hours. You have to factor in the short interest of the company, if the short interest is high then it will be very easy to squeeze the shorts resulting in a rally of share prices, the opposite of what you want. A short squeeze doesn't change the fundamental or quantitative reasons you wanted to short. The technical analysis should only be used to help you decide your entry and exit price ranges amongst an otherwise random walk. The technical rules you created sound like something a very basic program or stock screener might be able to follow, but it doesn't tell you anything, you will have to do research in the company's public filings yourself. Others have pointed out why one typically chooses a CD: to lock in an interest rate that's higher than most other savings accounts (at the expense of having quick access to your money). While most savings accounts have practically 0% return, there are high yield savings accounts out there with little to no strings that offer ~1% APY. I've personally not found CDs to be compelling when viewed against those, especially for something like an emergency fund where I'd rather just know it's available without having to think about penalties and such. Some people ladder CDs so that they're always no more than a month or so away from having access to some of the money, but for the return I've decided I prefer to just avoid the hassle. For 2.25%, which I haven't really seen, I might consider it, but in any case, you're better served by paying more to your loans. CD Laddering is a process of buying multiple CDs at longer terms to take advantage of better interest rates while still having liquidity. The benefit of a CD ladder is based on this assumption.  Without higher rates for longer terms, I wouldn't ladder CDs.  So, let's assume you have $10,000 to invest.   And let's say you have a 12 month CD at 1% and a 24 month CD at 2% available to purchase. You could lock all of your money up for 2 years and buy the 24 month CD at 2%.   This is a good rate of return, but locks up your money for longer than you might otherwise have planned. The laddering approach is to buy longer term CDs over a regular interval.   In this case, we could buy a 2 year CD at 2% every 6 months.   Your ladder would look like this: This gives you the 2 year rate (2%) but you are always less than 6 months until your next CD matures giving you some liquidity. When each CD matures, you then purchase another 2 year CD at the more beneficial rate.  You'll always have something maturing every 6 months. Now, if you want to start with your money immediately, you can seed your ladder by buying partial terms like this: The two year time maturity time frame and the interest rates are all examples.  You could have 12 CDs with one maturing every month, one maturing every quarter, etc. The benefits of CD Laddering are that a portion of your money is never far from maturity and that your interest rate is better than it otherwise would be. The risks of CD Laddering are the same as the risks of buying CDs.  If you think CDs are a good investment, CD Laddering is a good way to invest at higher rates. "The consumer who opens a CD may receive a passbook  or paper certificate, it now is common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements; that is, there is usually no ""certificate"" as such. http://en.wikipedia.org/wiki/Certificate_of_deposit Generally speaking, CDs should offer higher interest that typically doesn't vary, over the term of that CD.  So, in that way it offers a bit more security on the return.  But, they also lock up your money for a specific period of time." "Debits' and ""Credits"" are terms used in double-entry bookkeeping. Each transaction is entered in two different places to be able to double-check accuracy. The total debits and total credits being equal is what makes the balance sheet balance. For explaining debits and credits, wikiversity has a good example using eggs that I found helpful as a student.  Debits and Credits  When a financial transaction is recorded, the Debits (Dr) and Credits (Cr) need to balance in order to keep the accounts in balance.  An easy rule to remember is, ""Debit the Asset that Increases""  For example, if you want to practice accounting for cooking a simple breakfast, you might proceed as follows:  To record breaking the eggs and putting the eggs in the frying pan  In this transaction, an asset, (the egg) is split into parts and some of the asset goes in the pan and some in the trash. A Debit (Dr) is used to show that the assets in the pan and the trash both increase. A balancing Credit (Cr) is used to show that the amount of assets (whole eggs) in the egg carton has decreased.  This transaction is in balance because the total Credits equal the total Debits. Everything that is covered by the Debits (yolk, white and shell) is also covered by the Credits (one whole egg)" 3) Isn't strictly true, as off market swaps do trade quite regularly. For example, if the company has a bad credit rating, an off market swap is often executed to cover the credit costs (and essentially the cost of the bank's capital Under BASEL III.) Hence a bank shouldn't trade at mid. Can someone please explain the following in more detail please. I'm not exactly sure how and why synthetics work. &gt; Instead of having credit default swap reference a single company like Exxon, J.P Morgan bundled together a large, diversified basket of credit derivatives that referenced hundreds of corporate credits... those who invested in J.P Morgan's invention didn't own a piece of the actual corporate loan. Instead, they owned credit default swaps - the performance of which was determined by the performance of the underlying corporate credits.  This is from *All the Devils are Here* by Bethany Mclean and Joe Nocera I haven't read this article, but the most pressing question I have from the headline is the timeline. We all know that triple-a rated CDOs were horrific in the financial crisis. How about ones that have been created in the past couple of years? Essentially speaking, when you purchase goods worth $100 using your card, the store has to pay about $2 for the transaction to the company that operates that stores' credit card terminal.  If you withdraw cash from an ATM, you might be charged a fee for such a transaction. However, the ATM operator doesn't pay the credit processor such a transaction fee - thus, it is classified as a cash transaction.  Additionally, performing cash advances off a CC is a rather good indicator of a bad financial health of the user, which increase the risk of default, and in some institutions is a factor contributing to their internal creditworthiness assessment. "From your question, I believe that you are looking for what these mean in accounting terms and not the difference between a debit and a credit card. I'll deal with purchase and sale first as this is easier. They are the same thing seen from different points of view. If I sell something to you then I have made a sale and you have made a purchase. Every sale is a purchase and every purchase is a sale. Debits and Credits are accounting terms and refer to double column accounting (the most common accounting system used). The way a set of accounts works is, accounts are set up under the following broad headings: The first 3 appear on the Balance Sheet, so called because the accounts balance (Assets = Liabilities + Equity). This is always a ""point-in-time"" snapshot of the accounts (1 June 2015). That last 3 appear on the Profit and Loss sheet, Profit (or loss) = Income - Cost of Goods Sold - Expenses. This is always an interval measure (1 July 2014 to 30 June 2015). Changes in these accounts flow through to the Equity part of the Balance Sheet. When you enter a transaction the Debits always equal the Credits, they are simply applied to different accounts. Debits increase Assets, Cost of Goods Sold and Expenses and decrease Liabilities, Equity and Income. Credits do the reverse For your examples: 1. a customer buy something from me, what is the debit and credit? I will assume they pay $1,000 and the thing cost you $500 Your cash (asset) goes up by $1,000 (Debit), your inventory (asset) goes down by $500 (Credit), your Sales revenue (income) goes up by $500 (credit). This gives you a profit of $500. 2. a customer buy something of worth 1000 but gives me 500 what is     debit and credit Your cash (asset) goes up by $500 (Debit), your debtors (asset) goes up by $500, your inventory (asset) goes down by $500 (Credit), your Sales revenue (income) goes up by $500 (credit). This also gives you a profit of $500. 3. if I buy a product from supplier worth 1000 and pay equally what is credit and debit I assume you mean pay cash: Your cash (asset) goes down by $1000 (Credit), your inventory (asset) goes up by $1000 (Debit). There is no profit or loss here - you have swapped one asset (cash) for another (inventory). 4. if I buy a product from supplier worth 1000 and don't pay what is credit and debit Your creditors (liability) goes up by $1000 (Credit), your inventory (asset) goes up by $1000 (Debit). There is no profit or loss here - you have gained an asset (inventory) but incurred a liability (creditors). The reason for confusion is that most people only see Debits and Credits in one place - their bank statement. Your bank statement is a journal of one of the banks liability accounts - its their liability because they owe the money to you (even loan accounts adopt this convention). Credits happen when you give money to the bank, they credit  your account (increase a liability) and debit their cash balance (increase an asset). Debits are when they give money to you, they debit your account (decrease a liability) and credit their cash balance (decrease an asset) . If at the end of the period, you have a credit balance then they owe money to you, a debit balance means you owe money to them. If you were keeping a book of accounts then your record of the transactions would be a mirror image of the bank's because you would be looking at it from your point of view." Edit: This is paywalled so I pasted it here.  LONDON—The synthetic CDO, a villain of the global financial crisis, is back.  A decade ago, investors’ bad bets on collateralized debt obligations helped fuel the crisis. Billed as safe, they turned out to be anything but. Now, more investors are returning to CDOs—and so are concerns that excess is seeping into the aging bull market.  In the U.S., the CDO market sunk steadily in the years after the financial crisis but has been fairly flat since 2014. In Europe, the total size of market is now rising again—up 5.6% annually in the first quarter of the year and 14.4% in the last quarter of 2016, according to the Securities Industry and Financial Markets Association.  Collateralized debt obligations package a bunch of assets, such as mortgage or corporate loans, into a security that is chopped up into pieces and sold to investors.  The assets inside a synthetic CDO aren’t physical debt securities but rather derivatives, which in turn reference other investments such as loans or corporate debt.  During the financial crisis, synthetic CDOs became a symbol of the financial excesses of the era. Labelled an “atomic bomb” in the movie “The Big Short,” they ultimately were the vehicle that spread the risks from the mortgage market throughout the financial system.  Synthetic CDOs crammed with exposure to subprime mortgages—or even other CDOs—are long gone. The ones that remain contain credit-default swaps referencing a range of European and U.S. companies, effectively allowing investors to bet whether corporate defaults will pick up.  Desperate for something that pays better than basic government bonds, insurance companies, asset managers and high-net worth investors are scooping up investments like synthetic CDOs, bankers say, which had largely become the preserve of hedge funds after 2008.  Investment banks, which create and sell CDOs, are happy to oblige. Placid markets have made trading revenue weak this year, and such structured products are an increasingly important business line.  Synthetic CDOs got “bad press,” says Renaud Champion, head of credit strategies at Paris-based hedge fund La Française Investment Solutions. But “that market has never ceased to fully function,” he added.  These days, Mr. Champion still trades synthetic CDOs, receiving a stream of income for effectively insuring against a sharp rise in European corporate defaults.  Many investors, though, still view the products as unnecessarily complex and are concerned they may be hard to offload when markets get choppy—as they did in the last crisis. From the DepthsThe amount outstanding of European collateralized debt obligations has been growing again after years of shrinking.  “We don’t see that demand from our clients and we wouldn’t recommend it,” said Markus Stadlmann, chief investment officer at Lloyds Private Banking, citing concerns over the products’ lack of transparency and lack of liquidity, meaning it could be hard to offload a position when needed.  The return of synthetic CDOs could present other risks. Even if banks are currently less willing to loan money to help clients juice returns, credit default swaps can be very leveraged, potentially allowing investors to make outsize bets.  Structured products accounted for nearly all the $2.6 billion year-on-year growth in trading-division revenue at the top 12 global investment banks in the first quarter, according to Amrit Shahani, research director at financial consultancy Coalition.  “There has been an uptick in interest in any kind of yield-enhancement structure,” said Kokou Agbo-Bloua, a managing director in Société Générale SA’s investment bank.  The fastest growth this year has come in credit—the epicenter of the 2007-08 crisis. The top global 12 investment banks had around $1.5 billion in revenue in structured credit in the first quarter, according to Coalition, more than doubling since the first quarter of 2016. Structured equities are largest overall, a business dominated by sales of derivatives linked to moves in stock prices, with revenue of $5 billion in the first quarter.  “The low-yield environment hurts,” said Lionel Pernias, a credit-fund manager at AXA Investment Managers. “So there are a lot of asset owners looking at structured credit.”  These days, the typical synthetic CDO involves a portfolio of credit-default swaps on a range of companies. The portfolio is sliced into tranches, and investors receive payouts based on the performance of the swaps. Those investors owning lower tranches tend to get paid more but are subject to higher losses if the swaps sour. Structured GrowthBank revenues from structured products such as collateralized debt obligations are rising faster than conventionaltrading of stocks, bonds and currencies.  For instance, an investor can sell insurance against a pick-up in defaults in the lowest—or “equity”—tranche of the iTraxx Europe index, a widely traded CDS benchmark that tracks European investment-grade companies. In return, the investor will receive regular payments, but those will shrink with every company default and stop altogether once 3% of the portfolio has been wiped out through defaults.  During the financial crisis, synthetic CDOs based on standardized indexes like iTraxx Europe suffered losses as traders expected defaults to pick up. Investors who held on, though, have since done “great,” says Mr. Champion.  Investors who agreed to insure against a rise in defaults for 10 years on the equity tranche of the iTraxx Europe index in March 2008 have made roughly 10% a year, according to an analysis of data from IHS Markit . That’s despite defaults from two companies in the index: Italian lender Monte dei Paschi di Siena and Portugal Telecom International Finance BV.  In contrast, investors who sold insurance on tailored CDOs packed with riskier credits—such as Icelandic banks or monoline insurers—would have been on the hook for losses.  Synthetic CDOs have evolved since the crisis, bankers say. For instance, most are shorter-dated, running up to around two to three years rather than seven to 10 years. Some banks will only slice and dice standardized CDS indexes that trade frequently in the market rather than craft tailored baskets of credits.  There are also fewer banks involved in arranging these trades. Those active include BNP Paribas SA, Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase &amp; Co. and Société Générale.  Postcrisis regulations have forced banks to set aside more capital against these transactions and use less leverage. That has encouraged banks to parcel out the risk to clients rather than keeping it on their own books.  “There is a lot more regulation and scrutiny and a lot less leverage,” said Mr. Agbo-Bloua.  Mr. Champion says he only trades tranches based on standardized CDS indexes, which he says are easier to buy and sell than more tailored products. Currently, he sees value in selling default protection on super-senior tranches.  Mr. Champion said he has to lay down only around $1 million in upfront margin costs on a $100 million trade of this kind.  “The cost of leverage in the derivatives space is very low,” he said.  Any expectations of default rates picking up could inflict losses on synthetic CDOs, though at the moment analysts forecast they should decline. Still, the memory of how the market behaved in the immediate aftermath of the financial crisis is likely to keep many investors on the sidelines.  “If you’re the person responsible for buying the synthetic CDO that suddenly goes wrong, your career risk is bigger than if you’d bought a plain vanilla bond that goes wrong. It has a bad name,” said Ulf Erlandsson, a portfolio manager at start-up hedge fund Glacier Impact, who until recently oversaw credit for one of Sweden’s public pension funds. I see this as less conspiratorial than the housing market shenanigans because auto manufacturers really have no other choice but to make financing easier because if they didn't, they wouldn't be selling many cars and trucks.   The 2008 financial meltdown happened mainly because of derivatives. I don't know of any packaged bonds or CDOs made up of auto loans with credit default swaps riding on their backs.  So, a wave of defaulted auto loans just means that it will become a buyers market for used cars - if not another signpost of general American economic collapse. Thanks man. Even the credit default swaps were initially an amazing deal for the banks selling them. They got to collect huge amounts of premium for awhile thinking they'd never have to pay out. For the stories we heard in the Big Short, I bet there's hundreds of people out there who paid premiums for years until they couldn't anymore and never got their big payout.       It's crazy that you could basically take out an insurance policy on something you had no stake or equity in. It was literally a bet. The data supported the defaults too, though. Looking at [delinquency rates](https://fred.stlouisfed.org/series/DRSFRMACBS), Q1 of 2010 had a staggering *11.53%* of all mortgage payments being late. That's insane. Some people saw it creeping up and recognized that Q1 '08 was 76% higher than the previous year and was only climbing, and knew it was going to pop. This is one way in which the scheme could work: You put your own property (home, car, piece of land) as a collateral and get a loan from a bank. You can also try to use the purchased property as security, but it may be difficult to get 100% loan-to-value. You use the money to buy a property that you expect will rise in value and/or provide rent income that is larger than the mortgage payment. Doing some renovations can help the value rise. You sell the property, pay back the loan and get the profits. If you are fast, you might be able to do this even before the first mortgage payment is due. So yeah, $0 of your own cash invested. But if the property doesn't rise in value, you may end up losing the collateral. Yes, that would qualify as a scam to me.  I didn't think they could do most of those things, especially buying insurance without your permission.    When my area was reclassified as a flood area, they told me I had to provide proof of flood insurance, and if I didn't, they would get it for me at a price that might be higher than if I did it myself.  But there was no problem with my choice of an online flood insurance company that was much cheaper than my AAA insurance for the same.  I think that at least some of the rules are from the underwriter (?) like Fannie Mae or whoever it is that they work through.  I don't really know all the ins and outs, though.  I do know that when I had a loan through Wells Fargo, I had to increase my insurance in one area to match the value in another - I forget the details, but I think I could have reduced coverage in an alternate category if I had so desired.