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QUESTION
4. Describe the sub-prime crisis in early September 2008. What is the role of CDS in the crisis?
4. Describe the sub-prime crisis in early September 2008. What is the role of CDS in the crisis? Based on the credit risk valuation model we discussed in the class, what has been under-estimated by AIG when pricing CDS?
5. What is systemic risk? How does systemic risk differ from systematic risk? Why may one claim that when AIG was engaged in the CDS business it was underwriting systemic risk?
