There once was a man from Nantucket Who borrowed money in buckets And when I don’t pay The banks will just say We’ve got a bailout so [___] it. Now enough poetry. No default on the National debt.
Dude that was art.
Best post ever
Even if the probability doesn’t change 1:1, The return comes in at 1:1 which is what really matters. Going from paying 2bps/yr to receiving 42bps/yr is a great return, thats all I really care about. And I don’t believe a US default would be the end of capitalism, I can’t recall any ideology that wasn’t tested for millenias before it was disposed of. From what we know, capitalism will allow us to advance science faster than any other ideology we can think of. Now whether its up to us or not is another question… rise of the communist states… maybe, but communism is impossible unless all believe in it. I feel the west is going to become further fascist to control the state and that shall be our demise. and I have to agree, JDV wins the post of the year award.
go to the link to see how the market prices CDS (start on slide 7) http://www.yieldcurve.com/Mktresearch/files/Abukar_pptActualDec02.pdf you are basically deriving the credit curve from the current par spreads. using this credit curve, you value your position based on the spread you locked in. CDSW in bloomberg
I know how its calculated the problem is that the real probability of default is unknown by all market participants and formulating a probability of default for UST is almost impossible and can be off by 1 million st. deviations. The probability is the result of the spread as it is the only indicator about how perceptions view default. The bottom line is that, over the last year, should you have bought a CDS w/o the actual investment behind it, you would be up 14,200%, as you would have only paid $0.02/$100 for one year and would be able to lock in 9 years of $0.42/$100 as payment. Meaning an investment of $0.02 for a PVoa contract of $2.84 assuming a 5% rate.
I don’t think you can actually calculate a PnL assuming it’s a riskless investment.
I think I would be more inclined to sell this CDS than buy
ShouldBeWorking Wrote: ------------------------------------------------------- > I don’t think you can actually calculate a PnL > assuming it’s a riskless investment. What’s the risk? I get paid out. I assign the annuity to a life corporation who then pays me a lump sum. I’m out of the trade and I’ve had no risk throughout the entire process. I’m protecting bonds I don’t own so I have nothing to lose except the premium I pay for that protection.
the life corporation will not give you the pv under the assumption that its risk free. they will calculate the unwind value using the JPM model
ShouldBeWorking Wrote: ------------------------------------------------------- > the life corporation will not give you the pv > under the assumption that its risk free. they > will calculate the unwind value using the JPM > model But with the only risk being counterparty risk, using a cost of capital of 15% still provides a decent return. This has nothing to do with default UST at this piont, this has to do with default of the counterparties in the life co’s calculation of pvoa.