US Treasuries 40x riskier than last year?

[Saras]

well. Define "asset".

[Aeson]

All tangible and intangible property of positive value that you hold.

[Saras]

cds CAN become a liability. You're committed to pay xyz periodically to the seller, and if somehow the credit risk of the underlying disappears (or improves dramatically) you're just paying for nothing essentially.

[Aeson]

It's still an asset. You can sell the asset and "cover", locking in your profit/loss. (And yes, people lose money by buying assets high, and selling low, all the time.)

[Kidlicious]

In the case where future cash flows are negative you should count them as a liability I think.

[Kidlicious]

Originally posted by Aeson
It's still an asset. You can sell the asset and "cover", locking in your profit/loss. (And yes, people lose money by buying assets high, and selling low, all the time.)

They would probably be worthless though wouldn't they?

[KrazyHorse]

Originally posted by Saras


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...

It is an asset which can rise in value or fall in value. Just like most derivatives. Don't be ridiculous.

[KrazyHorse]

It's like saying that a futures contract is an "asset". It can be worth less than 0, of course. It costs nothing to enter into (other than margin requirements) but can decrease below 0 in value.

This is Finance 101.

[Saras]

Originally posted by KrazyHorse


It is an asset which can rise in value or fall in value. Just like most derivatives. Don't be ridiculous.

You have a weird understanding of what is an asset (and what is NOT).

Would you call an interest rate swap an asset? Would an FRA qualify? or an FX forward?

[KrazyHorse]

Originally posted by Saras


You have a weird understanding of what is an asset (and what is NOT).

Would you call an interest rate swap an asset? Would an FRA qualify? or an FX forward?

Yes, yes, yes.

I understand that you're saying they can be either "assets" or "liabilities", but the catch-all term is "asset" (yes, English sucks).

[Saras]

well, in my view the catch-all term is "derivatives". A swap is in fact a combination of an asset (a counterparty's obligation (contingent or fixed) to pay) and a liability (your obligation to pay), so in my view it's misleading to call an "asset" something that can become a "liability".

[KrazyHorse]

I simply meant to demonstrate that it has a present value associated with it (assuming the existence of a market for the derivative in question, of course). The catch-all term for these things is "asset".

[KrazyHorse]

Derivatives do not stay worthless and then gain a value when there is a cash flow associated with them. They can be bought and sold. They go up and down in value as the underlyings change in value (or change otherwise).

Derivatives can therefore be hedges, even if they never actually result in a cash flow.

By the way, I'm done with arguing about definitions. I note that the "derivatives are assets" mantra is fairly common in the finance classes I've taken. It drives home the point that they always have a value associated with them.

[Kidlicious]

Originally posted by Saras
well, in my view the catch-all term is "derivatives". A swap is in fact a combination of an asset (a counterparty's obligation (contingent or fixed) to pay) and a liability (your obligation to pay), so in my view it's misleading to call an "asset" something that can become a "liability".

That's why they are off balance sheet items.

But for the original issue KH is correct. Read the OP article. It talks about it in there.