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vickpr

Registered: May 2012
Posts: 3

05-04-12 11:51 PM

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.

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atticus

Registered: Mar 2007
Posts: 12701

05-05-12 12:58 AM

Quote from vickpr:

Ideally, I'd want to do this OTC, with no daily mark to market/model.

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.

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Traveler

Registered: Apr 2003
Posts: 774

05-05-12 02:47 AM

Do you have an ISDA? Otherwise you're shut out from OTC derivatives.

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Traveler

Registered: Apr 2003
Posts: 774

05-05-12 02:48 AM

If you can't sell the CDS, you could buy the bonds. Same risk position.

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nutmeg

Registered: Jan 2007
Posts: 18264

05-05-12 03:05 AM

Check out the "Big short" by michael lewis. The whole book details two guys in a garage f'n around with CDS.

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bwolinsky

Registered: Jul 2008
Posts: 4585

05-05-12 03:18 AM

Quote from Traveler:

If you can't sell the CDS, you could buy the bonds. Same risk position.

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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