What type of swap contract played a significant role in the GFC?
A)All swap arrangements
B)Fixed-for-floating swap
C)Overnight indexed swaps
D)Cross-currency swaps
E)Credit default swaps

Question

Quizplus · Accepted Answer

Credit Default Swaps (CDS) played a significant role in the Global Financial Crisis as they were used as insurance contracts against default on mortgage-backed securities. However, the market for CDS was largely unregulated, leading to banks selling CDS without holding enough capital to cover potential default claims. This contributed to the systemic risk that led to the collapse of major financial institutions during the crisis.

What Type of Swap Contract Played a Significant Role in the GFC