Who trades quanto CDS and CDS options?

PlasticSaber · May 18th, 2009, 11:10 pm

Browsed around Markit's website the other day. It mentioned that Markit has provided a range of independent valuation services including quanto CDS and CDS options (I am talking about CDS single name options rather than index options). I haven't come across either products when I am at work. Any idea which bank trades these products? Do they actually exist?

StructCred · May 19th, 2009, 5:50 pm

Quanto CDS is very common. People trade CDS on US names in EUR all the time and vice versa. I think a lot of people have underestimated how painful these things can get in a volatile market and the cost of quanto risk has gone up recently. For most names quanto contracts aren't actively quoted, so I doubt MarkIt has much beyond some theoretical framework for most names. Single name CDS options are about as common as flying pigs.

cigor · May 26th, 2009, 1:19 pm

Also, think about it, the only meaningfull CDS on sovereign name, is a quanto CDS - i.e. if you are betting on Argentina defaulting, you don't want your payoff in local currency - cause is probably worhless.

StructCred · May 26th, 2009, 5:27 pm

I generally wouldn't refer to a sov CDS in hard currency as a quanto instrument. By quanto I would generally mean a contract trading in the currency different from the liquid contract. I.e. Argy protection in JPY. Of course a lot of sovs trade in both USD and EUR, in which case you can end up with decent amount of quanto risk on a book, without either contract being explicitly quantoed

PlasticSaber · May 26th, 2009, 8:41 pm

In our desk, people the quanto CDS are simply referred as "XYZ in EUR (or USD) curve". I overlooked the fact something I deal with day in they out. After a bit of googling, I found some discussions about quanto CDS modelling. It should be a neat toy project.