Before the credit crisis, _________ were heavily used to protect against the credit (default) risk from investing in mortgage-backed securities.

Question

Quizplus · Accepted Answer

Credit default swap contracts were commonly utilized to hedge against credit risk when investing in mortgage-backed securities prior to the credit crisis. They provided protection in the event that borrowers defaulted on their underlying loans, allowing investors to transfer the risk to a counterparty. Standby letters of credit, interest rate swap contracts, and forward contracts on mortgages were not typically used for this purpose.

Before the Credit Crisis, _________ Were Heavily Used to Protect