Introduction

In the midst of the economic and financial crises which took place in 2008, the investment manager Anthony Keating at the Boston Private Bank Billingsley, Montgomery and Blaylock was seeking for the most effective investment strategy so that a commend ablere commendation would be given to the high-net-worth Clients. The traditional investment strategies were laying waste and the clients of Keating would be looking up to him for more effective and crucial ideas.

As the success of Paulson and Company had exceptionally inspired Keating, he intended to start exploring the possibility of entering a well suited trade that would provide utmost profit returns to him in case of any homeowner defaultedon their mortgages.Keating was being in learning more about trade, so he would come up with more knowledge about credit default swaps and mortgage backed securities.

Betting on Failure Profiting from Defaults on Subprime Mortgages Harvard Case Solution & Analysis

Key Issue

Due to the global financial andeconomic crises, theinvestment managershave been in the troubled situation where they were contemplating to ponder financialinstruments such as derivativesto invest in, because the equity sector was underperforming and had been estimated to continue to underperform in the future.

Now the main problem was to consider that which derivative to use to successfully invest the BBM’s client money. There were some options considered and the best option had to be chosen from the mix.

Portfolio Proposal: Recommendations and Rationale

A mortgage is supposed to be a contract related to the financing of real property between two parties.The lender receives payment from the borrower as interest in exchange for providing cash and he also assumes the risk of the default by borrower in purchase of the real property. There are many financial instruments which Keating can use in order to resolve the issue and through which,Keating would remain to bein the profitable zone irrespective of any default on mortgage.

The issue Keating passed along is the inevitable economic and financial crises that had lasted drastic impact on global economy as well as on financial markets. The everlasting impact cannot be ignored as there is a need to hedge the risk through effective financial instruments.

Keating must seek to find new investors which would be very beneficial for the banking sector because of the following discussed reasons;

It is very crucial to spread the risk exposure in order to move the debt which is backed by mortgage.
It involves creating high risk or lower grade sections and low risk investment grade from the mortgage pool.
It involves filling in collateralized debt into classes and trances of risk.
Along with this, the senior tranche or tranches would have low rate of interest and high credit rating.

Recommendation # 01:

The credit default swap can be speculated upon of the two below discussed manners which are;

The company may purchase credit default swap on the bonds which is has owned.
Secondly, the company may sell credit default swap to others.

Rationale:

Essentially,the large financial venture or specialist firms can buy credit default swapson the financial securities, which arenot owned by it and afterwards, the value of the credit default swap can be collected in case if a firm tends to default without a risk of cash losing on the corporate securities.....................

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