Let's make a real bet...

[Naked Gents Rut]

KrazyHorse, I want to bet you that the government of Pakistan will default on its debt sometime in the next five years. I will agree to pay you 75bp quarterly on a notional amount of $2000. If Pakistan defaults, you will have to pay me $2000 in exchange for Pakistani bonds worth $2000 today. If Pakistan doesn't default, you get to keep my quarterly payments and will owe me nothing.

Do we have a deal?

[Darius871]

I can't believe the mods are cracking down on calling someone a "liar" or "hypocrite" (more of an innocuous statement of fact than insults like "idiot"), but all the discussion of cash wagers is a-ok. Maybe I should keep a book on ponies here while we're at it.

[Naked Gents Rut]

At least this thread has some educational value.

[SlowwHand]

Darius, you idiot! Gambling isn't illegal; unless ACS kept some of the action.

[Naked Gents Rut]

This isn't gambling. I'm purchasing credit protection.

[Ming]

Originally posted by Darius871
I can't believe the mods are cracking down on calling someone a "liar" or "hypocrite" (more of an innocuous statement of fact than insults like "idiot"), but all the discussion of cash wagers is a-ok. Maybe I should keep a book on ponies here while we're at it.

You can find examples of people calling others liars, hyporcrites and other other innocuous insults in just about any politcal thread When it is a minimal thing, it is usually ignored. But when it goes ON AND ON AND ON with no end in sight, you can bet your sweet life that we will put an end to it

[Darius871]

Originally posted by Naked Gents Rut
This isn't gambling. I'm purchasing credit protection.

Ah yes, good ol' CDS's. Am I correct in assuming there doesn't need to be any privity with the creditors or debtors in question for a CDS contract?

[Naked Gents Rut]

That's a good question.

[KrazyHorse]

Re: Let's make a real bet...

Originally posted by Naked Gents Rut
KrazyHorse, I want to bet you that the government of Pakistan will default on its debt sometime in the next five years. I will agree to pay you 75bp quarterly on a notional amount of $2000. If Pakistan defaults, you will have to pay me $2000 in exchange for Pakistani bonds worth $2000 today. If Pakistan doesn't default, you get to keep my quarterly payments and will owe me nothing.

Do we have a deal?

Given that the latest quote on Pakistan CDS is like 3000 bp, I think not.

[Darius871]

Originally posted by Naked Gents Rut
That's a good question.

Bah, I was too lazy to consult wiki:

The associated instrument does not need to be associated with the buyer or the seller of this contract. ... [T]hey also are bought and sold as bets against bond defaults -- a buyer doesn't necessarily have to own a bond to buy the credit default swap that insures it.

http://en.wikipedia.org/wiki/Credit_default_swap

So yes, I hereby declare this flagrent gambling on Pakistan's default legal.

[KrazyHorse]

Dude, I don't know if you are aware, but the notional amount of CDS outstanding at one point was like 10X the actual amount of debt owed by all companies in the US.

[Naked Gents Rut]

Given that the latest quote on Pakistan CDS is like 3000 bp, I think not.

Damn. I was hoping you wouldn't look that up...

[KrazyHorse]

I knew 75 was too low (techinically quotes are given annually, so your bid was 300)

What the **** is happening in Pakistan?

[Darius871]

Originally posted by KrazyHorse
Dude, I don't know if you are aware, but the notional amount of CDS outstanding at one point was like 10X the actual amount of debt owed by all companies in the US.

10X???? It wouldn't even take a strangling amount of regulation to fix this, just a simple requirement of privity between the buyer or seller and the actual debtor or creditor. That wouldn't even require treating it like the insurance that it clearly is in substance.

[Naked Gents Rut]

Christ, at 3000 bp I'd end up paying you $3,000 for credit protection on $2000 if Pakistan doesn't default in the next 5 years. **** that. Let's just agree on the geometric mean of 75 and 3000.

I knew 75 was too low (techinically quotes are given annually, so your bid was 300)

I meant per annum, but didn't specify. That was the spread in the Lehman Brothers CDS we studied in class. You can tell it was agreed to in better days.