January 6th, 2011, 2:05 pm
yep, I think you need to post collateral, if you are a csa counterparty. why? because under csa, there is nothing called fully paid up option otc. if you buy an option from your counterparty, and up in MTM on day1 and pay up the full premium, it is like extending a loan to your countrparty. In old days, folks were okay with that, these days not so much. So the counterparty post you back the ~premium (depending upon thereshold etc etc) in collaterals. So if we are dealing with csa counterparties, irrespective of who is the buyer or seller, if there is any MTM movement, one has to post collaterals to the othersfor the case of CDS, it is not even fully paid up, it is a linear instrument on the spread, no? so more so reasons to ask for colalterals. Example: you run a coutnerparty risks that she might not pay in case of default of reference, she runs the risk that you can stop the running premiums in between. of course you understand the 1st part why she needs to post you collaterals if the spreads widens and you are the buyer. the 2nd part you can understand like this, most probably your counterparty has put up a hedge. So since the spread moved against you (say from 500bps to 50bps), you stopped paying. So she has to get out of this hedge too, and someone has to insure she doesnt loose on that process, that's the collateral for, from your side. making sense? at ground level from the trader's point of view, it is simple, you have to post collaterals, cause if she is hedged, her hedge counterparty would demand it (through treasury desk , and if not, her treasury desk would demand it anyways, and she will always be charged the funding in any case
Last edited by
prodiptag on January 5th, 2011, 11:00 pm, edited 1 time in total.