Kayla Renee Sabuero 08/26/2020

FINM 2 – A O
Individual Activity 1 – Documentary Video Preview

Questions:

1. Give 5 newly discovered finance/banking vocabulary words you encountered on the video.

• Synthetic CDO (collateralized debt obligation) - A synthetic CDO is a financial product that
invests in non-cash assets such as swaps, options, and insurance contracts to obtain
exposure to a portfolio of fixed-income assets. It is one kind of collateralized debt obligation
(CDO).
• Credit Default Swap (CDS) – The term credit default swap (CDS) refers to a financial
derivative that allows an investor to swap or offset their credit risk with that of another
investor. To swap the risk of default, the lender buys a CDS from another investor who
agrees to reimburse the lender in the case the borrower defaults.
• Subprime Mortgages - A derivative is a financial instrument whose value changes in relation
to changes in a variable, such as an interest rate, commodity price, credit rating, or foreign
exchange rate.
• Balloon Payments - A balloon payment is a large payment due at the end of a balloon loan.
This type of loan intentionally structures earlier payments during the loan term to be
smaller and for later payments—often just the last payment—to be higher. This type of
loan can a mortgage, commercial loan, or any other type of amortized loan. It is considered
similar to a bullet repayment.
• Hedge Fund - A hedge fund is a limited partnership of private investors whose money is
managed by professional fund managers who use a wide range of strategies, including
leveraging or trading of non-traditional assets, to earn above-average investment returns.

2. Given 1 major problem discussed in the video and explain its effect in the economy.

Recessions - The effects of recessions can be summarized as follows: increased

unemployment, decreased wages and incomes, and a general loss of opportunity. Education,
private capital investments, and economic opportunities are all expected to suffer because of
the current downturn, and the repercussions will last for a considerable amount of time. In
2004, the Federal Reserve raised the fed funds rate just as the interest rates on these new
mortgages reset. Housing prices started falling in 2007 as supply outpaced demand. That
trapped homeowners who couldn't afford the payments but couldn't sell their house. When
the values of the derivatives crumbled, banks stopped lending to each other. That created the
financial crisis that led to the Great Recession.

3. What are your insights/ learning after watching the documentary?

- After watching the video, I had a better understanding of how important it is to educate
oneself on risk management. For financial institutions to maintain their profitability and
ensure that they are solid, effective risk management is essential. It is the procedure that
bank managers devised to guarantee that all risks connected to the activities of the bank
are recognized, measured, limited, controlled, and mitigated, as well as reported in a
timely and complete manner. What took place on Wall Street was that the banks did not
want to know how much risk they were taking on, they did not want to have to quantify it
on their balance sheet, they wanted to be able to push it off and hide it, and that is why
they lobbied so hard to make sure that swaps and derivatives would be treated
differently from other types of financial problems. It is stated in the documentary that if
there is a lack of transparency and control in the derivatives market, then the risks will
continue to accumulate, and eventually they will cause a financial crisis. I realized that
there is no way to completely remove risk; all that can be done is to pass it on from one
party to another. This was a valuable lesson for me.