CDS VS stock vol relationship?

omniaz · April 24th, 2007, 1:42 am

hi, any one could help advise on the relationship between CDS & Stock Volatility?many thanks.mate

AlphaNumericus · April 24th, 2007, 2:27 am

The CDS spread and the implied vol (esp. from out of the money puts) are well known to be highly correlated. When one moves, but not the other, trading the CDS and the puts to express the view that they'll revert to their istorical relationship is called capital structure arbitrage.

omniaz · April 24th, 2007, 3:20 am

many thank.. really appreciate your help..

lenni · April 25th, 2007, 3:51 am

which strike is usually traded with cap structure arb? what i really want to know is what the highest strike that ppl will use to trade this.