Provide useful information to investors

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Reference no: EM131305228

In 2010, there were several proposals to regulate the use of credit default swaps (CDS) by speculators. An opinion column by Darrell Duffie of Stanford in the Wall Street Journal argued that: Speculators also provide us with information about the fundamental values of investments. When the fundamentals appear favorable, they buy. Otherwise, they sell. If their forecasts are correct, they profit. This causes prices to more accurately forecast an investment's value, spreading useful information. For example, the clearest evidence that Greece has a serious debt problem was the run-up of the price for buying CDS protection against the country's default.

a. What are CDS?

b. What does it mean to say that there was a "run-up of the price for buying CDS protection against [Greece's] default"?

c. How does the run-up in price referred to in b. provide useful information to investors?

Reference no: EM131305228

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