US Treasuries 40x riskier than last year?

[Kidlicious]

Originally posted by Aeson
I personally would be writing as much CDS on US Treasuries as I possibly could if only I could fool people into thinking I could possible back it

That's true. Stocks are sooooo last year. Let's write derivatives.

[KrazyHorse]

Originally posted by Kidicious
Also, the article says the price is driven by speculation that the credit rating of the US Treasuries will deteriorate, not because investors actually believe the US will default.

Given that the US Treas. CDS are 40 bp, it's pretty obvious that most people don't actually "believe" that the US will default.

[Kidlicious]

Originally posted by KrazyHorse


Given that the US Treas. CDS are 40 bp, it's pretty obvious that most people don't actually "believe" that the US will default.

So the higher the bp the higher the risk of default of the debt that it's tied to, right? Is that how they all work?

[KrazyHorse]

Of course. Add in some model of risk aversion and you can pull out the probability of default being predicted.

[KrazyHorse]

If there was no counterparty risk in CDS then the "risk neutral probability" of default over the next year would be ~40/10000 (there are some issues with the fact that the premium is paid going forward, that payments cease after a default event and that the bonds may not be totally worthless after a partial default event).

[Aeson]

Originally posted by Kidicious
Is that where the bailout money is going?

oh... and dividends too...

[Kidlicious]

And the Eurocoms are forcing the companies that recieve their bailouts to suspend dividends. This country is ****ed.

[Saras]

Originally posted by KrazyHorse


What do, CDS? They hedge against price falls of bonds due to default risk factors.

No, they don't. CDS protects against actual default, not against price movements due to the possibility of default rising. What you said is price falls due to ratings changes or severe operational setback (AND resulting ratings changes).

[Saras]

should have read whole thread... :S

[Lancer]

Nah. I read the whole thread and it didn't do me a bit of good.

[KrazyHorse]

Originally posted by Saras


No, they don't. CDS protects against actual default, not against price movements due to the possibility of default rising.

You have no clue what you're talking about. A CDS is an asset. It appreciates in value when the underlying bond decreases in value due to an increase in risk. It is therefore a hedge against bond price movements due to default risk factors.

[Arrian]

Originally posted by Lancer
Nah. I read the whole thread and it didn't do me a bit of good.

I'm with ya, Lance.

-Arrian

[Lancer]

Originally posted by Arrian


I'm with ya, Lance.

-Arrian

The bragging rights of that admittion are often very limited indeed.

[Saras]

Originally posted by KrazyHorse


You have no clue what you're talking about. A CDS is an asset. It appreciates in value when the underlying bond decreases in value due to an increase in risk. It is therefore a hedge against bond price movements due to default risk factors.

a CDS is not an asset, it's a derivative contract that increases in value (if you're the one hedging credit risk) as default risk rises, and decreases as default risk falls. You can lose money buying CDS... That is due to the fact that the contract states you will get a full payout in case there is an event of default.

But you're correct in the last sentence.

[Aeson]

... CDS you buy/hold are assets, CDS you sell/write are liabilities