Risks of Leveraged Products

Leveraged investments have become a fundamental feature of modern economies. The new financial products allow people to take greater-than-usual exposures to risk factors. This thesis analyzes several different aspects of the risks involved by some frequently used leveraged products: CDOs, CDSs, and hedge funds. It is shown that these risks have indeed several facets and that misjudging them can have severe effects for both individual investors and the global financial stability. However, although leveraged products can be more complex than other financial instruments, their characteristics in terms of risks and returns can usually be understood rather well by careful scholars. The aim of this thesis is to contribute to a better understanding of some of the features of leveraged products and provide useful insights on how to best use these new instruments.

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