Purchasing Credit Default Swaps?

Discussion in 'Trading' started by kowboy, Jan 31, 2009.

  1. kowboy


    I need help from someone experienced in purchasing CDS, who actually purchases these, to give me some initial direction.

    I want to purchase corporate or municipal bonds for long term interest income. At the same time I want to concurrently purchase a CDS insuring against default, with the idea in mind that it's better to pay the ongoing premiums and to accept the lesser net income after deducting the premiums.

    1. Implementation: What venue are CDS traded or purchased on and may I purchase the CDS directly on a liquid market without going through a full fee broker on my side?

    2. Risk: Is there a way to determine who the counter party would be? I am most concerned about determining the credit worthiness of the counter party who sells the CDS to me.

    Thank you in advance for any help.

  2. kowboy


    bump hoping for a reply
  3. I have experience with this - I am also on vacation and have only spotty service on my blackberry...

    I PM'd you my email or I can reply here in more detail Monday.

  4. Buy treasuries and forget about this.

    Traditional cds spread is the isolated risk premium over treasuries.

    Sounds like what you want are treasuries.
  5. Right now BBB yields - CDS > 200 bps.

    So if you can borrow at funds + 100 the play looks pretty good.

    Of course you will have counterparty risk on the CDS.
  6. kowboy - i'm in the office today. not sure if you decided against this or not but if you want information I'll be happy to provide it.

    I'd reccomend against as an individual - unless you have crazy credit and a ton of money it will be next to impossible to find a counterparty unless you assume a lot of risk (large margin requirements, high financing rates, MTM on daily or monthly resets, etc. etc...)
  7. kowboy



    Thanks for the reply. The more I find out, it appears next to impossible to implement.
  8. the industry as a whole is having a hard time with counterparties - there are fewer and fewer of them and the good ones are very picky. As an individual I doubt you could even establish a brokerage arrangement nevermind the rest of the arrangement.

    good luck though!
  9. If you want in on CDS - buy the 100k version of Paulson's fund, or buy Fairfax Financial.