The bid/ask of GM 6mo CDS’s are at around 26,000 bps How can a CDS trade at above 10,000 bps? Wouldn’t 10,000 bps be 100% protection? Can someone explain that?
Aren’t GM CDS trading on a daily basis now? Like 120 bp gets you through today, 240 through tomorrow, etc? That kind of process is where the 26000 comes from.
i read today that the big 3 are considering converting their industrial loan companies to BHCs in order to tap into TARP sounds like one way or the other the american people are going to be footing the bill for all this shit
Still, it seems like they can’t possibly default on the same credit more than once in that 6 month period. Oops we defaulted, recovery will be 50%… oops, we default on the 50% you were going to recover… you’ll get 25%… etc.
Just think of it as paying monthly insurance. It’s like owning a car in Brooklyn in the '70’s. You could have a $1000 car but after 6 months you had paid more than a $1000 in theft insurance premiums if you still had the car (unlikely).
Im just thinking theoretically. Why would you go long a bond at that cost? You own a GM bond, lets say 10MM. You pay 26MM to insure it? I don’t get it why not just let it default?
Is my understanding right? You are long 10MM GM 7.2 1/15/2011’s. Lets say you bought them at .70 some time ago. You want to insure your position for the next six months. So you would have to pay 26MM to insure that 10MM position? Am I missing something?
what’s the yield on these suckers as of now?
My car got stolen in 06 in Brooklyn
A CDS buyer is not paying the total cost of the CDS upfront. Therefore, the price is so high because the CDS sellers are betting that GM defaults before it receives all of the CDS payments.
Obviously genius, but a cds at 26000bps and a recovery rate of anything (20-40%), that still estimates a probability of default of 100% in 1.4-1.8 months or 2.3 months should the recovery rate be 0%. Anything over a CDS of 10000 bps means that there will be default with 0% recovery within 6 months. I guess that fact that they are saying they won’t make it past the end of the year and an implied recovery rate of 30-40% makes sense for a 50% chance of default by the end of the year. All I know is this CDS is going to explode one way or another when a decision is made.
They are trading points up front.
I don’t get it. You pay 26MM, and have BD or Bank counterparty risk right? And whether its cash or physical settled, unless you question the counterparty risk, your payout is only par, right? I don’t see the upside of owning a CDS. over 10000 bps I guess is my confusion. I’m not questioning you just tring to understand