China to Introduce Credit-Default Swaps by Year-End

[Andy Nguyen]

Wasn't the US CDS originally introduced for the same reason?

“We believe CDS is a neutral risk-management tool,” Shi said. “It is neither evil nor good.”

Would be interesting to see how China regulate this market

China to Introduce Credit-Default Swaps by Year-End - BusinessWeek

 

[Sanket Patel]

No naked positions - where's the fun in that

 

[Uncle Max]

Naked positions will be replicated by financial engineers Welcome to the bubble

 

[Joy Pathak]

Naked positions will be replicated by financial engineers Welcome to the bubble

What products could you use to make a synthetic naked CDS ?

 

[iHateVariance]

in the case of corporate default u can use deep OTM puts to construct equivalent payoffs to CDS. but contractual language of CDS could include other credit events with respect to ref ob.

 

[Uncle Max]

What products could you use to make a synthetic naked CDS ?

It's a good exam question for 9814 class. We will discuss it with Bob after class on Wednesday at the Globe.

 

[Joy Pathak]

It's a good exam question for 9814 class. We will discuss it with Bob after class on Wednesday at the Globe.

Sounds good to me.

 

[iHateVariance]

did i get it correct max?

 

[Sanket Patel]

in the case of corporate default u can use deep OTM puts to construct equivalent payoffs to CDS. but contractual language of CDS could include other credit events with respect to ref ob.

Actually, I believe the cashflow profile of a cds can be replicated in a fairly straightforward using an asset swap.

I'd love to go into more detail but since this, as Max indicated, may end up an exam question, I don't want to spoil the fun for the class

 

[bob]

It's a good exam question for 9814 class. We will discuss it with Bob after class on Wednesday at the Globe.

We'll actually talk about this in class 4 or thereabouts. But I'm not averse to spoiling my own punchlines over beers.

 

[iHateVariance]

sure Sanket i know what u mean. but if u have to own bond to buy cds u would prbly would have to own bond to swap away some of the risk via asset swap and both types of cotracts would prbly be subject to same regulations. i think it is interesting how they will margin cds(in order to reduce leverage) such that not to spoil ROE of natural longs, who might find it not attractive to sell cds if u have to post pile of cash(assets) against it and prevent careless risk taking like AIG.

 

[Uncle Max]

did i get it correct max?

I don't know... I didn't think about it But it's a good question and if you want to discuss it, come tomorrow (Wednesday) to the Globe at 9PM. This kind of issue can be considered only over a beer

Cheers