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UK And US Among Top 5 Weekly Sovereign Deriskers
The week's biggest (sovereign) CDS movers have been released, and we have some new entrants in the most endangered species list. While by now nobody will be surprised that the UK is a consistent top 2 player (coming in this week with $319 million in net notional derisking, this making it the 8th week or so the country has made the top 3), only behind Italy and its $452 million in net notional, and just in front of last week's #1 Brazil, the presence of the United States at #4 should be a little unsettling. It has been months since the US appeared in the top 5. And just like in the long gold case, the same types of existential questions once again arise when the interest in US CDS picks up: who gets to pay off your contracts in the case of an event of default? Elsewhere, the presence of Korea and Turkey (or Australia) in the top 10 should not come as too surprising. On the other end, short covering was violent in CDS of Spain, Hungary and Portugal - Europe's newest lepers. Is the CDS community concerned the EU can actually pull out a rabbit out of the hat that actually works for once? Hardly. The top 10 reriskers also saw the inclusion of France and long-forgotten insolvent Greece.
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Close the Fed's swap lines would be a start. Swiss National Bank- crazy !
I confess, I find it difficult to understand what this information means and would really appreciate it if someone could explain it for me? I.E. in simple terms what does it mean to be at the top / bottom of the list?
The current 'on the radar' potential defaulters' appear to be at the bottom of the table .... but some other noteworthy candidates are at the top??? I.e Italy
I am assuming that the top 10 (in red) indicate those whom the market perceives as having increasing risk of default so why are the likes of Spain, Hungary, Portugal et al at the bottom and shown in green?
Does this mean we (Australia) are increasingly perceived as a possible sovereign default candidate ..... which is of course is anthema to what our MSM propaganda machine is feeding us?
uncertainty = being on either end of the spectrum.
Hi TYLER
Whenever this chart above appears I ask the same question "can someone PLEASE tell me where I can go to purchase this information?" but I never seem to get an answer.
Tyler can you PLEASE help me in answering the above question as I would like to purchase the CDS swap chart as presented above.
Thanks Tyler or anyone else that can help answer this question.
P.S to Advoc8tr
i'm no expert and i could be wrong but i think the CDS swaps at the top in red show that certain entities are purchasing insurance in the form of (CDS) because they think the government will default on bond payments. At the bottom in green is the opposite, they are unloading these CDS contracts because they think the government will pay out on it's bonds therefore they don't need to ensure against default. Maybe someone with in depth knowledge can answer better then me but this is my understanding and I hope this helps, cheers Mate!!
I would like to ask a question about CDS and hope that some one with an indeapth knowledge on the subject can help me please.
My understanding and please correct me if i'm wrong, is that these CDS are a synthetic instrument based off exchange in a dark pool of trading that is only accesible to a select privilaged few. Because you don't need to own the underlying bond on which the CDS contract was based they are now being used as another mechanism for entities to attach countries at will. Kind of like taking out insurence on your nabours house and then mysteriously one day it burns down and you are able to collect in the insurance policy.
My question is this.
Q; The institutions who sell the CDS to a clients have to pay out on them I assume, so does this not make them a net looser and if so, then why would they want to do this? Unless maybe they are using this information to make a profit in another arena like say forex or futures?
Thanks in advance
Credit derivatives [or in this case CDS] became basically common knowledge in 08. There are plenty of papers, articles and encyclopedia entries on the internet where you can gain in-depth [well, not in-depth but wide enough] knowledge about these instruments.
And the seller is liable for settlement [pay out] on the RE only if a contractually defined CE occurs in the underlying RE; there are no "losers" if the symmetry of interest payments and principal redemption in the underlying bond is not broken and if the quarterly/semi-annual/annual CDS payments are not cut short.
CDS are fixed income securities [much like bonds or any other plain vanilla derivatives for that matter] meaning that their price is a computation of principal, coupon and yield of some RE. Decoupling in the price of a CDS [spread] from the RE has become a problem since late 07.
As I said, CDS are too broad of a topic to be easily explained in one comment. Browse the net and you will find more than you need.
Interesting... Fear is growing among european leaders. Nicolas Sarkozy and Angela Merkel have posted a comon letter to José Manuel Barroso. They ask for a quickening in applying regulation for the financial markets (CDS are the primary target). You can <a href="http://www.elysee.fr/president/les-actualites/communiques-de-presse/2010..." target="_blank">read the letter in french here</a>.
Thank's Cheeky Bastard, appreciate the response, any idea where Tyler obtained the above chart from ????
Cheers
most probably; DTCC.
www.dtcc.com
Tyler told that he is getting info from this site.
But i have checked this site, coudnt find this information , it must be available to members only.
I love getting this table from ZH every week.
It's like waiting for the top40 pop chart when I was a boy, except with an added icing of DOOM.
Black Swan, I'll try to simplify, maybe it’ll help.
All financial instruments at the end of the day are nothing but a function of cash flow and timing, with that in mind you can pretty much dissect any exotic financial animal, with relative ease.
If you own a CDS on an underlying bond, in the event of default, you as a CDS buyer will turn in your bond to the CDS seller, to receive par value for the bond (the bond may be trading pennies on the $) and this is the risk the CDS seller is willing to take in return for the fat premium you pay him over the life of the bond.
A CDS buyer pays insurance premiums to insure against default of a given bond and note he may or may not own(naked CDS) this bond. The CDS buyer pays his premiums on a quarterly/semi-annually basis to the seller of this insurance (CDS). This premium is paid over the life of the underlying bond, so this is our cash flow stream.
CDS payouts are calculated using 2 factors - probability of default and rate (%) of recoverability given default (or LGD - loss given default)
Now the seller of the CDS sets the premium amount using two things, you guessed it cash flow and timing. So he looks at the cash flow stream and does an NPV on that and estimates the principal he will be able to recover if the bond defaults and he is left holding the defaulted bond.
Lets say he estimates the bond to default in next 5 years and he hopes to recover 30% of par on the bond when this default happens. He uses this 30% number (CF) and back calculates on an NPV basis, as to how much his quarterly premium should be to make him whole, i.e. on the day of transaction neither buyer nor seller has an arbitrage, or in other words the premium + recoverable part of defaulted bond on an NPV basis = NPV of bond coupon + principal payments.
so to your question
“Q; The institutions who sell the CDS to a clients have to pay out on them I assume, so does this not make them a net looser and if so, then why would they want to do this? Unless maybe they are using this information to make a profit in another arena like say forex or futures?”
The institution (CDS seller) will hope to recover most of what he pays out on default and gets to keep all the premium for free if the bond never goes bust. So in no way is he eating the loss on default unless, there is a black swan that throws a wrench in his probability model, like Lehman going bust, but then again if I had done my homework I would have priced the CDS right.
Hope that helps - IB
Innocent Bystander
Love your work and thanks for the input, as always i never stop learning as a result of ZH.
Cheers
EURO chart indicates a move soon :
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1