3. According to the video, what is a credit-default swap?

In this video credit default swaps are shown as forms of insurance. These are credit subordinate
agreements that empower speculators to trade credit risk on an organization or with an country.
These are common type of OTC which are frequently used to move credit exposure on fixed
income products to hedge risk. Credit default swaps are altered into two counterparties which
makes them hazy, illiquid, and difficult to follow for controllers

When someone sells insurance on bond you own and if bond goes belly up the person will ppay
you and if the bond rate doesn’t goes up you pay that person. This process is known as credit
default swap. Bear Stearns had this agreement with many people all over the world.

In other words, we can say that deal is done with a party by the investment bank and says “I will
sell you this and if you go out of business, I will pay you a specific amount.

Credit default swaps provide with the provision for the transfer pf credit risks from one party to
another.

5. What is moral hazard? How might it affect firms?

A issue faced by Paulsen and Bernanke after helping bail Bear Stearns was moral hazard, It is the
idea if the government was going out to bail out one company due to their own failures, what
incentives do other companies have to operate effectively.

In other words, moral hazard also mean a party has an incentive to take unusual risks in a
desperate attempt to earn profit before the contract settles.