DVA

gigichang · September 25th, 2009, 12:43 pm

Could someone share some ideas of how to hedge DVA ( firm's own credit ? )

gigichang · September 26th, 2009, 6:27 am

gigichang · September 26th, 2009, 6:27 am

gigichang · September 26th, 2009, 6:35 am

Let me rephrase the question, how to hedge your own credit ( this 'unsustainable' profit appearing on some banks quarter results ) indirectly ? Selling financial index or your competitors CDS will leave you big IDR risk, which a Merrill trader should / could / would have avoided selling protection on Lehman.

gigichang · September 26th, 2009, 6:36 am

Let me rephrase the question, how to hedge your own credit ( this 'unsustainable' profit appearing on some banks quarter results ) indirectly ? Selling financial index or your competitors CDS will leave you big IDR risk, which a Merrill trader should / could / would have avoided selling protection on Lehman.

AhBa · November 20th, 2009, 5:53 am

hi, why would any trader bank want to hedge their own credit? There is no natural instrument to hedge this out, and intuitively we can think of CDS but why would any institution trade CDS on say bank ABC, with bank ABC? Its just a risk that any institution has to take, that every firm is long their own credit risk.

mutley · November 20th, 2009, 7:02 am

introduces a moral risk to the firm selling bank ABC protection on itself - ABC can then go wild once insured, safe in the knowledge it has a safety net. This is why banks don't sell put options to HF managers on their own funds.