AbbeFaria Wrote: ------------------------------------------------------- > would that protect against only a spread widening > though? I thought it had to be a credit spread > option, I just can’t remember what option it’d > be. > > thetank Wrote: > -------------------------------------------------- > ----- > > buy cds a schweser or mock exam had this exact question and the answer was CDS because they dont’ neccesarily only pay off due to a default and the others didn’t cover the downfall.
anyone recall the exact details. very fuzzy for me… how can a CDS protect against spreads widening?
right, selling just doesn’t make any sense to me, buying I vaguely remember that the term of CDS could be flexible, so maybe we can define the trigger of payment as wide spread instead of default
rohufish Wrote: ------------------------------------------------------- > CDS won’t trigger until default event. need credit > options, i think i voted for the short calls??? > fuzzy on the details now. the puts didn’t work for > some reason. Default event can be a change in spread; doesn’t have to be a default.
rohufish Wrote: ------------------------------------------------------- > anyone recall the exact details. very fuzzy for > me… > > how can a CDS protect against spreads widening? because as spreads widen out, cds protection also costs more
^ agreed they are custom instruments and a credit event can be customed specified, complete cr@p question though since the best answer was no available.
CDS has all kinds of credit events, such as restructuring, failure to pay, repudation moratorium, obligation default, obligation acceleration and bankruptcy.
credit spread widening is not a trigger, the price of a cds depends on the credit quality right, so the crappier the credit the more it costs, so if a corporate bond’s credit spreads widen out from 250 to 300, the cost of its protection also goes up, so whiles you lose on your bonds, you just bought protection at 250bps and now it costs 300 bps, you can turn around and sell that protection to lock in a 50bps gain
yes but duration measures sensitivity to a parrallel shift in interest rates. The questiosn asks about “yield curve” so duration is less of an issue. Isn’t that the the whole point of the two bond hedge for MBS.
lots of assumptions in there…no one said CDS would be liquid prior to maturity. or that the event specification is a nonstandard spread spec.
remember that it’s a swap, its liquidity is no different from any other OTC swaps, you can always enter into an offsetting contract with another counterparty
a bond appreciates by 0.3% and you had borrowed at 4.28% out of 7 million, 2 million was equity and 5 million was borrowed… anyone remember wat was the answer?
that was a small trick question: R_portfolio = R_invested + Borrowed/Equity ( R_Bond - Cost of borrowing) the trick was R_invested (original portfolio) was different from the return on the bond.
yes, i ended up using a manual calc rather than formula. it was a trick question.
I checked it both ways just to make sure, it was the first time I see it done like that.
you guys talking about the 2.86%?
yes, it was something like that.
i didnt even remember the formula… used manual calc and got it right…
gips: 12.3 and 7.6 or 12.8 and 9.8?
buy receiver swaption. payer swaption is incorrect. you want to receive the fixed rate, which can be acheived through a receiver swaption.