SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
User avatar
Money
Topic Author
Posts: 580
Joined: September 6th, 2002, 4:00 pm

Vanilla CDS trading

September 4th, 2010, 6:14 am

Hi folks,What instruments are used to hedge the CS01 of the CDS instuments ?On vanilla IRS , the delta can be hedged by FRA, euro-dollar futures... etc.I am just wondering what are the analogy on credit side ? Is there something like credit index futures ?Otherwise, how are the risk monitored and hedged ?Thanks
 
User avatar
daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

Vanilla CDS trading

September 4th, 2010, 9:48 am

this is like asking how do you trade equities ...you can trade CDS against bonds (basis trading), against other CDS (rv trading), against an index(index arbitrage), against CDS in the same name but different maturity (curve trades)., against equity vol (cap structure arb)...
Last edited by daveangel on September 3rd, 2010, 10:00 pm, edited 1 time in total.
knowledge comes, wisdom lingers
 
User avatar
qrsr
Posts: 2
Joined: February 21st, 2009, 10:13 pm

Vanilla CDS trading

September 8th, 2010, 11:36 pm

CDS positions expose you to a variety of risks, such as credit risk, default risk, interest rate risk, counterparty risk, liquidity risk etcTo the exchange that you're trading a typical name, then the majority of the risk you are exposed to is the credit risk of the issuerSo a first-order hedge for this type of risk would be a bond of the same issuer, with similar maturity, and similar seniority in the firm's capital structure
 
User avatar
dvl84
Posts: 14
Joined: July 6th, 2010, 1:01 pm

Vanilla CDS trading

October 15th, 2010, 9:19 pm

There is no similarity to IRS trading where you immediately trade some bund/bob/schatz or euribors when you do a swap trade as market maker. In general CDS market makers can trade a single name CDS relatively easy via the brokers in 5yr. So when you get hit/lifted in a name where you don't like the position you will hit/lift the street or in case where you can't trade in the street you buy/sell some Itraxx (crossover/hivol/financials/main) depending on the single name. In case you are a market making in the index and you are not able to trade in the street, you will do a trade in the spx or dax future to hedge.
 
User avatar
jfuqua
Posts: 1255
Joined: July 26th, 2002, 11:41 am

Vanilla CDS trading

May 20th, 2012, 4:23 pm

This is a really simple question. I may have some details wrong---hopefully not a complete mess.For a CDS on a basket [if this does not violate the meaning of 'basket', to keep simple say each firm may default , when there is a default] held by some trustee or 'index fund', I assume the payment made is made to the protection buyer and then the value of the basket is reduced and so also is the value of the 'index.'E.g. in the index trades it is thought Morgan/Chase made, if there is a default by [a] company, is that then reflected 'directly' in the value of the contract and Index and then the contract/Index value can also be affected by the prices buyers/seller are willing to pay for the Index ? With the Morgan/Chase contracts I've not heard of any actual defaults in that Index having occured, so I take it that their 'loss' was only in the value of the contract traders have made.
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On