Hello everyone,Does anyone know how a bank makes money when they issue CLNs to clients?I am not talking about the hedging of debt by the bank. I'm talking about the structured products that bank offer.Does the money come from the difference between the coupon paid to the investor and what the bank gets from the spread on sale of the CDS + the coupon received on the collateral?That is, if the bank gets 5% from the CDS and 2% from the collateral, the bank will pay the CLN investor only 6% and keep 1%?Is it how it work or I am totally wrong?Thx a lot

Yes, generally this is how it works.In the simple case we have the following:The desk receives money from the investor and invests it (probably by transferring to treasury), from which it will earn a coupon of X. Then it sells short a CDS, for which it will receive a coupon of Y. The fair coupon on the CLN is then X+Y and the theoretical PV is 100%. And now the desk will simply lower this coupon to pocket the difference as margin.Be aware however that this case does not necessarily reflect reality anymore. For example due to the switch to fixed coupons in the CDS market you cannot exactly replicate cashflows anymore..HTH

QuoteOriginally posted by: TadYes, generally this is how it works.In the simple case we have the following:The desk receives money from the investor and invests it (probably by transferring to treasury), from which it will earn a coupon of X. Then it sells short a CDS, for which it will receive a coupon of Y. The fair coupon on the CLN is then X+Y and the theoretical PV is 100%. And now the desk will simply lower this coupon to pocket the difference as margin.Be aware however that this case does not necessarily reflect reality anymore. For example due to the switch to fixed coupons in the CDS market you cannot exactly replicate cashflows anymore..HTHGreat thank you very much!What do you mean by switch to fixed coupon in the CDS market please? You mean upfront payment of the coupons or not?When you buy protection with a CDS, you pay a fixed spread. I dont understand the problem.Can you explain me please? Thanks again!

Starting in 2009, the buyer of protection pays a fixed coupon plus a (variable) up front payment.

QuoteOriginally posted by: acastaldoStarting in 2009, the buyer of protection pays a fixed coupon plus a (variable) up front payment.Yes that's what I thought. By the way, do you know how to compute the upfront to be paid please?Or how to convert from a standard fixed coupon payment to an Upfront + fixed coupon?Thx a lot

QuoteOriginally posted by: Jeffy14QuoteOriginally posted by: acastaldoStarting in 2009, the buyer of protection pays a fixed coupon plus a (variable) up front payment.Yes that's what I thought. By the way, do you know how to compute the upfront to be paid please?Or how to convert from a standard fixed coupon payment to an Upfront + fixed coupon?Thx a lotThis has been discussed quite a bit on the forum in the past, but I would suggest looking at CDSmodel.

QuoteOriginally posted by: bearishQuoteOriginally posted by: Jeffy14QuoteOriginally posted by: acastaldoStarting in 2009, the buyer of protection pays a fixed coupon plus a (variable) up front payment.Yes that's what I thought. By the way, do you know how to compute the upfront to be paid please?Or how to convert from a standard fixed coupon payment to an Upfront + fixed coupon?Thx a lotThis has been discussed quite a bit on the forum in the past, but I would suggest looking at CDSmodel.Thx a lot Bearish!