Credit Default Swaps: Past, Present, and Future

Open Access
Author:
Schubert, Bradley Lawrence
Area of Honors:
Interdisciplinary in Economics and Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Christoph Hinkelmann, Thesis Supervisor
  • Brian Spangler Davis, Honors Advisor
  • Russell Paul Chuderewicz, Honors Advisor
Keywords:
  • Credit Default Swaps
  • CDS
  • Dodd-Frank
  • Regulation
  • Great Recession
  • subprime mortgage
  • Futures Market
  • Financial Derivatives
Abstract:
The Financial Crisis of 2007-2009 was the biggest recession America had seen since the Great Depression. Now known as the Great Recession, some scholars believe it was even worse than the Great Depression. The inner workings of this financial crisis will be studied extensively in the years forthcoming. Every new piece of research will continue to add different portions to the already difficult equation of uncovering the truth. There will always be differences of opinions on who, or what, caused America’s financial system to crumble. No matter how many studies will be published on the Great Recession, there will always be a few common denominators. The first is that the subprime mortgage lending market was growing at an uncontrollable rate. This led to a housing bubble, which was the ultimate cause of the recession. Reasons for the extreme growth in subprime lending can and will be argued for years to come. The other common factor that arises when studying the crisis is that financial derivatives were involved. The main types that were used are credit default swaps (CDS) and collateralized debt obligations (CDO). There is a stigma towards the CDS because it is blamed for causing the crisis. This thesis attempts to study a different view on how the CDS market was used in the lead up to the crisis. In addition, the future of this market is very much in question, and regulation may be the key to getting past this negative reputation. The evolution of the futures market may be tied closely to how the CDS market can regain a positive view.