Question

TRUE? FALSE?

1. A CDS is potentially dangerous because it can incentivize risky investments, like emerging markets bonds or subprime loaded MBS, and transfer risk outside of the financial institutions to insurance industry as a form of insurance.

Answer 1

True

Reason : Credit default swap does not eliminate risk it simply transfer risk to insurance company.In any case an investor is going to loose because he is paying premium to the insurance company.CDS is potentially dangerous because investor buys risk investments like emerging bonds and enter CDS in which there is high chances of failure and to protect themselves from failure they pay preimum but ultimately investor is losing money somehow by way of premium or loss in the value of investments.