Quote from FrankSlaughtery:
selling vol/cds/puts/whatever is NOT free money
if it was it would've been arbed a long time ago. pls don't be like Victor Niederhoffer who made money for years selling index puts then blew up in a week. if the notional on a cds car is $10m and you only take in $50-100k for selling protection, you can hopefully imagine what happens to you in the event something unexpected happens.
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Erm, actually, Greek restructuring was deemed a credit event and a CDS trigger. Greek sov CDS did pay out in the end.Quote from Runningbear:
Given that Greece technically defaulted but managed to negotiate a 60% write down in debt without actually defaulting, then your pretty spot on. Default swaps are now not worth the paper they are printed on. Any government can now write off 90% of their debt without defaulting. What a joke.
Quote from vickpr:
Thanks for the responses, folks! I'm not saying there's no risk. I just think that I don't need to worry about it in my lifetime.
I still want to sell these, if possible. I understand that no one would probably want to buy these from me, due to counterparty credit risk, but maybe I can work something out where I start putting up money if the risk of a credit event occurring increases significantly?
For example, it's pretty safe to assume that Australia won't default on its debt in the next 5 years. I get to collect premiums (30-40 bps? I know US is around 30 bps) till then and say something happened and the risk of default suddenly increases, I will be able to put up a lot more money to cover losses. Again, the real issue here is margining. I can't put up too much money in the beginning.
This is not the same as selling CDS on mortgages. My broker friend who was making millions selling homes in California told me in 2005 that the party was about to be over. Shame on AIG for not seeing this.. I'm very comfortable betting my entire net worth on Australia not defaulting on its debt. lol, probably sounds a lot like what AIG was thinking back in 2006.
Can I open a "Hedge Fund", get a prime broker account (I don't even know if I have enough money to get one of these) and then sell CDS? Anyone know anyone at a bank who I can talk to and figure out how much I will have to put up, and how much in notional I can sell?
No. Go open an IB account (I presume they offer ASX futures), buy Aussie 3y bond futures, sell a strip of IRs (or IBs). That's the closest you can get to sovereign CDS. Given that you don't seem to comprehend exactly what you're doing, I am pretty sure you're equally certain to lose money in either case.Quote from vickpr:
Can I open a "Hedge Fund", get a prime broker account (I don't even know if I have enough money to get one of these) and then sell CDS? Anyone know anyone at a bank who I can talk to and figure out how much I will have to put up, and how much in notional I can sell?
Let's not close pls... I am exceedingly eager to get to the bottom of this whole "logarithmic at zero" concept. I think bwol is close to revealing the most important advance the world of fixed income has ever known. Whatever you do, don't tell Bill Gross.Quote from atticus:
Can we close this now? Logarithmic at zero? Que?
Quote from Martinghoul:
No. Go open an IB account (I presume they offer ASX futures), buy Aussie 3y bond futures, sell a strip of IRs (or IBs). That's the closest you can get to sovereign CDS. Given that you don't seem to comprehend exactly what you're doing, I am pretty sure you're equally certain to lose money in either case.
There is no way for anyone, institutional or otherwise, to trade derivatives without mark-to-market. To imagine otherwise is delusional.
Let's not close pls... I am exceedingly eager to get to the bottom of this whole "logarithmic at zero" concept. I think bwol is close to revealing the most important advance the world of fixed income has ever known. Whatever you do, don't tell Bill Gross.
CDSs are contracts that are governed by the ISDA Master Agreement. You will need around $100k (rough estimate) to pay lawyers who will negotiate the terms with your counterparty. Once that is out of the way, for a naked short CDS position you can expect to post a minimum of arnd 10% of notional in initial margin. There is no standard contract size, but there are considerations of economies of scale for counterparties. In you case, I doubt it's worthwhile for a counterparty to get involved.Quote from vickpr:
Assuming that my positions would be marked to market, how much in notional would I be able to sell with around 250K in capital? How does margining work. I'm assuming the "standard" contract size is 10 million? Assuming that the CDS on Aussie debt is trading at 50 bps, how much in initial margin would I need to come up with, for selling 10 million in protection? Any help is very much appreciated.
Erm, just think about it. Warren Buffett doesn't have to mark-to-market, because the PNL volatility of his put position is a relatively tiny fraction of the capital available to him. Moreover, even in an extremely adverse scenario, Buffett's put position isn't likely to completely blow him up. Is all this the case for you? As to the yearly premia, Aussie 5y CDS is arnd 75 mid now. Does 0.75% sound like a return that is significantly higher than the risk-free rate of return on your capital?When I was first making this post, I recalled Berkshire Hathaway selling puts on Equity Indices in 2008 without daily mark-to-market. I'm not saying that counterparties should view my credit risk just the same as Buffet's but maybe I won't have to put up as much capital and those yearly premiums will be significantly higher than the risk free rate of return on the capital I put up?
You didn't read what I said carefully enough. I didn't just suggest that you buy the bonds. I said that you should buy the bonds and sell a strip of STIR futures to construct an asset swap position, which is as close as you or I can get to trading CDS. Once you have a few hundred mil, however, things may change and your bank may be willing to offer you these products.Also, I'm not looking to go long those bonds. My goal is to take on as much of the default risk as I can, and none of the inflation risk etc... I also want to do it while putting up as little money as possible to maximize returns. I seriously don't think Australia will default on its debt anytime soon and willing to bet my life on it.