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Category Archives: derivatives
How the CDS Market Can Support the Bond Market
I’m glad that Equity Private quoted herself yesterday, because I missed this the first time round: Are we surprised when people point fingers at Bear and suggest, for instance, that they are buying up the underlying assets and loosening credit … Continue reading
Posted in bonds and loans, derivatives
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Misleading Chart of the Day: Credit Premia
Martin Wolf appends this chart to his most recent column. It shows the well-known-by-now interbank spread – the way that Libor has gapped out relative to central bank rates – and tries to decompose it into two parts: a credit … Continue reading
Posted in bonds and loans, charts, derivatives
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US Default Risk Soaring
Shorting subprime? That was a good idea. Or shorting agencies, or any other credit product, for that matter. But shorting US Treasuries in July? That, surely, would have been pretty disastrous. Unless, that is, you went short not directly, but … Continue reading
Posted in bonds and loans, derivatives
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CDS: It’s Not About Credit
The FT has an excellent article explaining that corporate issuers are now being able to price new bonds off their illiquid secondary-market bond curves, rather than off their (wider) CDS curves. If you have real corporations borrowing real new money … Continue reading
Posted in bonds and loans, derivatives
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Fannie Mae Datapoint of the Day
Fannie Mae’s credit default swaps are trading over 200bp, despite their implicit government guarantee. Writing protection at these levels seems like a no-brainer to me: even if there is an event of default, recovery is going to be very close … Continue reading
Posted in derivatives
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Delphi: The Post-Default Aftermath
Were you someone who wrote credit protection on Delphi? If so, you’re feeling a bit as though you dodged a bullet write now. Alea reports: In 2005 when Delphi went bankrupt there was some fear of a short squeeze in … Continue reading
Posted in bonds and loans, derivatives
2 Comments
ABX Datapoint of the Day
As Peloton implodes, it’s liquidating its long mortgage positions, to nasty effect. The triple-A tranche of the most recent ABX index is now at just 61, while the double-A tranche has crashed all the way to 26. Yeah, that’s the … Continue reading
Posted in derivatives, housing
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It Could Have Been the Trade of a Lifetime
Yesterday, John Carney asked why rogue traders always seem to lose money rather than making it. Today we find out exactly why, at least in the case of MF Global: their rogue trader, Brent Dooley, was trading his own account. … Continue reading
Posted in derivatives
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Reasons to be Sanguine about CDS Counterparty Risk
I spoke today to Nishul Saperia at Markit about credit default swaps, and I’m very glad I did: he’s cleared a lot of things up for me, especially on the problem of counterparty risk. Here’s one problem, as explained by … Continue reading
Posted in derivatives
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Adventures in Swapland
The Economist reports on something known as a "CMS spread ladder swap," which apparently was reasonably popular among German municipalities before it blew up. They were paying a relatively high fixed interest rate on their debt, and Deutsche Bank helpfully … Continue reading
Posted in derivatives
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Counterparty Risk in CDS Auctions
Diana Henriques has a piece in today’s NYT about CDS auctions. There are opaque auctions, like one recently held for something known as "pay as you go" credit default swaps; there are also transparent aucions, held by Creditex and Markit. … Continue reading
Posted in derivatives
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Will Bond and CDS Prices Ever Converge?
If bond and stock prices are out of whack, then maybe it shouldn’t come as any surprise that bond and CDS prices are also trading miles apart from each other. In fact, you have to be careful when you try … Continue reading
Posted in bonds and loans, derivatives
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The Only Way to Win is Not to Play
A great post from Andrew Clavell today, which can be distilled down to one simple piece of advice: Just Say No to Derivatives. If you’re buying derivatives and you’re not a banker, or if you’re buying a derivatives product which … Continue reading
Posted in derivatives
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When the Markets are Wrong
The markets don’t always make any sense, and this headline from Bloomberg gives a prime example: Northern Rock Credit-Default Swaps Rise on Nationalization Yes, in the wake of the news that the Northern Rock was going to be owned by … Continue reading
Posted in derivatives
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Did Black-Scholes Cause the Housing Bubble?
Michael Lewis gets his nerd on in the March issue of Portfolio, wading into the Taleb vs Black-Scholes debate. But he actually seems to go even further than Taleb. Think of three levels of skepticism when it comes to the … Continue reading
Posted in derivatives
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Misleading Chart of the Day, CDS Edition
This graphic comes from Gretchen Morgenson’s front-pager in the NYT yesterday. I’m not going to try to reproduce it here, because my column width isn’t big enough to really see what’s going on. But suffice to say that it shows … Continue reading
Posted in charts, derivatives
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Jerome Kerviel, Prop Trader
It seems to be emerging today that Jerome Kerviel’s job was not nearly as clerical and low-risk as SocGen first made out: his lawyers now claim that his trading was in profit to the tune of €1.5 billion at the … Continue reading
Posted in banking, derivatives
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SocGen’s Big Mistakes
Did Jerome Kerviel and Societe Generale cause Monday’s market meltdown? I asked the question yesterday, and today it’s looking increasingly as though the answer might be yes. His positions are being reported at between 40 billion and 50 billion euros, … Continue reading
Posted in banking, derivatives
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SocGen: The Cause of Monday’s Sell-Off?
Was a single 30-year old French equity-derivatives trader directly responsible for the emergency 75bp rate cut that Ben Bernanke announced on Tuesday morning? It’s entirely possible. The fraud at Societe Generale was uncovered over the weekend, at which point the … Continue reading
Posted in Davos 2008, derivatives, stocks
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Equity Derivatives House of the Year
An as-yet-unnamed trader at SocGen has somehow contrived to lose more than $7 billion by making bad directional bets on equity indices. Bloomberg’s Gregory Viscusi is on irony watch: "At first this seemed like a joke," said Nicolas Rutsaert, an … Continue reading
Posted in banking, derivatives
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The CDS Losses Arms Race Continues
There seems to be some kind of an arms race going on to see who can come up with the scariest number for total losses in the credit default swap (CDS) market. Remember Bill Gross with his $250 billion? Well … Continue reading
Posted in derivatives
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Will the CDS Market See $250 Billion in Losses?
Bill Gross’s Investment Outlook this month includes the normal mix of hyperbole and mixed metaphors ("securitized WMDs", "the pyramid begins to unravel"). But get past that, and you’ll find him saying that the CDS (credit default swap) market poses a … Continue reading
Posted in derivatives
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Two Trades for 2008
I don’t make predictions. But, what the hell, let’s see how these two trades turn out over the next year. The first is highly speculative, and individual investors aren’t even allowed to do it; the second is highly defensive, and … Continue reading
Posted in bonds and loans, derivatives, stocks
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ACA Reminds the Markets of the Importance of Counterparty Risk
Here’s the chart of ACA’s share price, from when it went public at the end of 2006 at $13 per share, through to yesterday, when it was delisted at $0.31 per share. Today, S&P finally got around to slashing ACA’s … Continue reading
Posted in derivatives
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Fishy Dealings in Trane Options
Trane is one of those invisible companies which is also omnipresent: it has operations everywhere from the Statue of Liberty to the Kremlin, and has even found its way into Portfolio’s offices in Times Square. It’s just been bought for … Continue reading
Posted in derivatives
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