Please don’t take this prediction too seriously but I think the “Phrase of the Year” will be something like– “… is struggling to hedge its exposure” and hence the “Word of the Year” will be something like “hedging”. Of course it will be #1 only in the case the word “meltdown” does not beat it out. Credit default swaps were invented to hedge risk while maintaining most of the profit, which is against the laws of arithmetic. Someone has to have symmetrically lower profit for more risk. When I’m struggling to see this as a big picture it comes to me something like: Old McDonald decided to hedge his farm and purchased the protection from the horse. The horse decided that it had too much exposure to the farm it knows well from inside and hedged with the cow. The cow hedged its exposure by purchasing some CDS that the dog Bingo was selling, who then shorted the cat’s enterprise to hedge his farm exposure. The cat was already holding some puts against the mouse, so it felt fine. The mouse decided to purchase huge amounts of physical cheese to get through the recession and, well, the cheese stood alone. Back in 2008 everybody hedged […]
