Category Archives: derivatives

How the CDS Market Can Support the Bond Market

Posted on March 12, 2008 by Felix

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 →

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Misleading Chart of the Day: Credit Premia

Posted on March 12, 2008 by Felix

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 →

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US Default Risk Soaring

Posted on March 12, 2008 by Felix

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 →

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CDS: It’s Not About Credit

Posted on March 7, 2008 by Felix

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 →

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Fannie Mae Datapoint of the Day

Posted on March 6, 2008 by Felix

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 →

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Delphi: The Post-Default Aftermath

Posted on March 5, 2008 by Felix

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

Posted on February 29, 2008 by Felix

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 →

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It Could Have Been the Trade of a Lifetime

Posted on February 29, 2008 by Felix

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 →

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Reasons to be Sanguine about CDS Counterparty Risk

Posted on February 28, 2008 by Felix

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 →

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Adventures in Swapland

Posted on February 25, 2008 by Felix

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 →

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Counterparty Risk in CDS Auctions

Posted on February 22, 2008 by Felix

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 →

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Will Bond and CDS Prices Ever Converge?

Posted on February 20, 2008 by Felix

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 →

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The Only Way to Win is Not to Play

Posted on February 20, 2008 by Felix

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 →

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When the Markets are Wrong

Posted on February 19, 2008 by Felix

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 →

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Did Black-Scholes Cause the Housing Bubble?

Posted on February 19, 2008 by Felix

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 →

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Misleading Chart of the Day, CDS Edition

Posted on February 18, 2008 by Felix

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 →

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Jerome Kerviel, Prop Trader

Posted on January 28, 2008 by Felix

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 →

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SocGen’s Big Mistakes

Posted on January 25, 2008 by Felix

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 →

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SocGen: The Cause of Monday’s Sell-Off?

Posted on January 24, 2008 by Felix

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 →

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Equity Derivatives House of the Year

Posted on January 24, 2008 by Felix

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 →

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The CDS Losses Arms Race Continues

Posted on January 14, 2008 by Felix

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 →

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Will the CDS Market See $250 Billion in Losses?

Posted on January 8, 2008 by Felix

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 →

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Two Trades for 2008

Posted on January 2, 2008 by Felix

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 →

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ACA Reminds the Markets of the Importance of Counterparty Risk

Posted on December 19, 2007 by Felix

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 →

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Fishy Dealings in Trane Options

Posted on December 17, 2007 by Felix

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 →

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