The other use of credit default swaps, and the position usually taken by the other side of a trade, is speculation. Like investing in stock options, credit default swaps give a speculator a way to make a large profit from changes in a company's credit quality. For example, if a company has outstanding debt, and if the company has been having problems, it may be possible to buy the outstanding debt (usually bonds) at a discounted price. For example, if the company has one million dollars worth of bonds outstanding (one million dollars worth of debt), it might be possible to buy the debt for 900 thousand dollars from another party if the company has been doing badly and the other party is worried that the company won't repay (the other party would be willing to take some loss to recover some money). If the company does in fact repay the debt, you would receive one million and make a 100 thousand dollar profit. With a credit default swap, one could sell the other investor credit protection and receive, for example, one hundred thousand dollars, and keep the premium if the company does not default. In this case one would make a hundred thousand dollar profit without having invested anything. It is also possible to buy and sell credit default swaps that are outstanding. Like the bonds themselves, the cost to purchase the swap from another party may fluctuate as the perceived credit quality of the underlying company changes. But these pricing differences are amplified compared to bonds. Therefore someone who believes that a company's credit quality would change could potentially profit much more from investing in swaps than in the underlying bonds (although encountering a greater loss potential). http://en.wikipedia.org/wiki/Credit_default_swap the carnage in housing.. huge potential for profit in CDS's.
CDS in home builders would be nice. Where does the average guy get access to bona fide cds though? I dont think joe average can buy them. Anyone who knows if it's possible to be retail and buy cds, please tell.
gee ... I thought if you enter a swap agreement you had to own the paper to start with...I mean you have to swap something for the premium.... if is there a swap market with a ratio greater than 1:1 the next thing I'll hear is the earth is flat...
http://www.marketwatch.com/News/Story/Story.aspx?guid={00A24926-B281-4B50-B257-F8AE13DFAA5D}&source=blq%2Fyhoo&dist=yhoo&siteid=yhoo for those concerned about the 'flatness' of earth, instead of the flatness of their equity curve. http://theflatearthsociety.org/
http://www.conning.com/asset/viewpoint1206.pdf ..the amount of CDS in play can dwarf the amount of bonds outstanding.
putting all this together the fed is more likely to ease then raise rates. 1) bond market rallying ten year 4.67---> 4.50 2) dollar should come under pressure GBP/USD EUR/USD ..should rally GBP/USD--> 1.9900 EUR/USD ---> 1.33 3) stock market will be underpinned/supported, the feds hands are tied. The trouble in US housing, fueling the liquidity equilibrium from central bankers flooding the globe with money. Even though market forces seek to contract credit.
there is 100 x times more CDS in circulation than the net worth of the worlds stock markets. I heard you can strip off a cds and sell part of it leveraged to somebody else, basically leveraging the trade 10-100 fold. It's common with the automakers right now. Traders can even sell it back to the person who sold it to them, but stripped off and sell another batch leveraged to someone else. Its not highly regulated or run through clearing houses like bonds and stocks. All OTC. When a financial reckoning day comes, there will be a big wakeup call.
Unless you have 10MM notional, most CDS deals are traded in the OTC market. 10MM is about the smallest we will work with on the desk.. The dealers, spread the things out wider than a football goalpost partially because the pricing on some of them is so shaky. Rooms of pricing specialists come up with a number, then the dealing desk traders will spread the mofo 16 pts out (some less, some more). So, if you buy it, you're in the hole and at the mercy of prevailing market trends and your dealer. It's a game of russian roulette combined with musical chairs. You don't want the gun in your face when the music stops.