Saturday, January 19, 2008

How to calculate how much money one would make on CDS trades

Guide: What is basis point value, (BPV)?

Download the Basis Point Value Quick Guide as a PDF
BPV is a method that is used to measure interest rate risk. It is sometimes referred to as a delta or DV01. It is often used to measure the interest rate risk associated with swap trading books, bond trading portfolios and money market books. It is not new. It has been used for years. In many financial institutions it has been replaced or is used in conjunction with value at risk. BPV tells you how much money your positions will gain or lose for a 0.01% parallel movement in the yield curve. It therefore quantifies your interest rate risk for small changes in rates

Posted by lvmreader @ 09:28 PM (994 views)
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3 thoughts on “How to calculate how much money one would make on CDS trades

  • When you read about Credit Default Swap (CDS) spreads on an entity moving from 89 to 841, this guide can help you calculate how much money you could have made if you had anticipated the move.

    In most cases, we will deal with 5yr CDS trades, but the recent increasing risk of default of WaMu, Countrywide et al will show incredible profits if you had anticipated the movement correctly.

    Depending on how you structure the trade you could make $10s of dollars per basis point move (a basis point is 1/100th of a % – thus 0.25% interest rate move is also called 25 basis points)

    Imagine having a trade where you got paid for the move from 90 bps to 3,742 bps and you got paid $10 per bp move per contract. And you had 100s of contracts?

    A better bet than buying and selling houses, no?

    Of course, if the trade goes against you, you could be in for some pain. Worse still, you need to have margin on deposit. But a good thing to be aware of.

    This is bond mathematics ultimately.

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  • “Now, 27-year-old David Crisp is floating in default notices. So are family members and employees, current and former. No other local real estate agency has been hit by such a rash of defaults on large loans in recent months, a Californian survey has found.”

    “Crisp said some of his family’s properties in default are home to relatives, while others are investment properties.”

    Ha ha ha ha ha! This story is good. It renews my faith in the essential goodnes of humanity. The EAs aren’t malicious after all – they’re just stupid.

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  • Damn. I have put my comment in the wrong article. Sorry. please ignore!

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