Accruing the interest (i.e. PIK) has some practical differences from issuing at a discount. 1. Early repayment is simpler2. The accounting might be cleaner.

<t>Including the classic explanation I was given of what one group does:"risk arbitrage""what do they arbitrage""undervalued companies""you mean they buy companies they think are cheap and short similar companies that they consider expensive?""no, they just buy shares in cheap companies"Defn: Arbitr...

<t>Thanks for the reply. Credit has always seemed a bit odd to me because you are trying to measure a low probability event, so you wait forever, and then once you observe it the company you are looking at is dead and gone anyway. (Gross oversimplification ignoring the fact multiple companies are in...

<t>I am trying to estimate how much history you would want to estimate the probablity of default of a company.I am using the formula for sample size of: n = 1/4 x (Zc / error) ^ 2So for 95% confidence and 20% error the numbers are:N = 0.25 x (1.96 / 0.2) ^2 = 25For a single A credit the probability ...

<t>Two things that might (slightly) redeem the buyside people:- maybe some of the option premium (I'm assuming that for +ve m2m you can cancel and receive the upside) was built into the swap rate taking BB to L+60. - structurers taking lots of money out of the deal via the derivatives desk, only par...

<t>I have seen a similar situation. The conclusion we reached was that the swap was too expensive but you couldn't sell or exercise because you would then have to buy a replacement swap and that would also be too expensive. [Hmm systematic overpricing......]The swaps desk assume optimal exercise bas...

<t>Title was inaccurate........but did provoke some useful feedback.Not hedging is definitely bad. But poorly implemented hedges can be worse than not hedging. For an LBO where the swap has duration of between 5 and 7, for a 1 bip parallel move you see:- floating bank debt gain 1 bip- swap current p...

<t>Just read in the economist about a major f***up in Ashanti's (a gold mining company) hedging policy. They seem to have had a long dated hedge on the price of gold and margin calls. As the price of gold moved their cash benefited by one periods worth of improved selling price, but they had to fund...

<t>Thanks, that helps.So whilst the PIP principle works for any distribution and you can use it to define a VAR, the VAR you get may be very badly behaved in the 1% of the time when things go bad.I guess the next question is, if you need 8000 years of history to measure the risk of some positions th...

<t>Just finished reading aaron's "the unbearable lightness of cross market risk". The idea of the PIP is sweet but I don't understand why portfolios are so hard. Why can't I take a portfolio containing some MSFT and some oil futures, calculate what the value would have been for each of the past 100 ...

<t>Similar story from a few years ago. I came into work and found that the p&l was mysteriously up. Other desks with open option positions had the same problem. Turns out a BO guy at one of the brokers had exercised all of the calls with strikes above the market, and the puts with strikes below ...

<t>Japanese salesman: what do you pay for x calls....I sell them to you.Trader: sells 100 bunds to hedge<one minute after the first call>Japanese salesman: errr, did I just buy or sell?Trader: I bought the call from the client.Sales: oh, my mistake, client wants to buy calls.Trader+Sales: <figure ou...

<t>Thanks for the replies but I still don't understand why somebody would need to diversify their government bond portfolio. What kind of investor cares about GBP vs USD govvie risk?Surely the JPY market must have some investors who just look at the rating.....though given japanese bank portfolios a...

<t>The British government recently sold USD bonds. These then traded through Treasuries. Why would anyone accept a lower yield for UK govt $ risk than US govt $ risk?Also, the economist reports that Jap BB spreads are under 150 bips. As sterling BB are hundreds of bips wider why shouldn't issuers sw...