Selling Credit Default Swaps on Sovereign Debt

V

vickpr

I'm just your average middle class 9-5 working guy, so putting up millions in margin accounts may not be feasible... I have this theory that as long as stable governments can print money, they will not default on their bonds. This probably sounds beyond ridiculous but.I want to take advantage of this by selling CDS on sovereign debt. I'm willing to put up all my savings, 401K etc to pursue this.

Is this even possible? If so, how can I go about figuring out how (if any) margining would work? Ideally, I'd want to do this OTC, with no daily mark to market/model. Of course, I'm confident that the sovereigns I'd be betting on would not default in my lifetime and I hope to make a very comfortable living from the premiums...

This is a serious post, so please be nice. :)
 
Quote from vickpr:

Ideally, I'd want to do this OTC, with no daily mark to market/model.
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Wouldn't we all! I've never heard of a CDS agreement that wasn't MTM. It would f*ck-up the netting ability.

I am not on BBG at the moment, but assume you're short a $30k figure against $10MM notional in a US CDS. You're not required to maintain the figure, but who's going to take the risk? The risks are of "double default" as the reference Sov may go into default and you would be unlikely to pay out on the swap. Of course, it's infinitely more likely that you will reneg, therein lies the rub.

I assume by middle class you mean to state that you couldn't cover the $9.97MM if the US defaulted in the first year. Or you just an average guy with a $10MM 401k?

No, it's not possible. wtf.
 
Quote from Traveler:

If you can't sell the CDS, you could buy the bonds. Same risk position.
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That's not even remotely close to the same position.

Bonds are logarithmic at zero. CDS could be way more than a 100% loss.
 
Quote from bwolinsky:

That's not even remotely close to the same position.

Bonds are logarithmic at zero. CDS could be way more than a 100% loss.
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i think he meant same directional view, i.e. doesn't mind taking the credit risk of the soverign. haha.

*edit- but then again, he shouldn't have named it "risk" position.
 
Quote from bwolinsky:
That's not even remotely close to the same position.

Bonds are logarithmic at zero. CDS could be way more than a 100% loss.
More...
Huh? Say what? Logarithmic at zero?

The closest you can get to CDS in a retail setting is using futures to create either a yield spread or an asset swap position. Obviously, it will be marked to mkt.
 
i was going to write a sarcastic response back but in the spirit of "if you can't say something nice"...here goes...to the op, you are taking a risk you do not think you are taking by selling cds on countries. just b/c something hasn't happened before doesn't mean it won't happen in the future. i'm going to put this next sentence by itself so you don't forget it:

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.

long story short, it's your money but if you put this trade on w/ your life savings, eventually it'll all be someone else's money.

let me be clear - i'm not trying to rain on anyone's parade - esp the op's - just to highlight the risks that are there.
 
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.
 
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