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But... If I'm a hedge fund, why even own Greek debt plus the insurance? Just buy the insurance, and burn Greece. I'd also be buying (CDS) on other tipping-po
by mdda 15y ago
But... If I'm a hedge fund, why even own Greek debt plus the insurance? Just buy the insurance, and burn Greece. I'd also be buying (CDS) on other tipping-point countries, and watching the knock-on effect.
Ah : But that demonstrates how terrible CDS is, and how amoral hedge funds are. Actually (IMHO) the fact that Greek CDS was so cheap to buy was just an indication of how little trust people have that politicians respect the law in European countries. It would have been far cheaper to have sorted through this mess on day one, rather than spending taxpayer funds giving Greeks a lifeline when the changes that they have to make were always inevitable.
And now the politicians words have been demonstrated to be completely worthless, there'll be a lot more pain - in countries where it might otherwise have been unnecessary.
- achompas 15y agoBut... If I'm a hedge fund, why even own Greek debt plus the insurance? CDSes are generally used to hedge a position. If a hedge fund holds both Greek bonds and CDSes on those bonds, they come out ahead regardless of what happens to Greece.
- mdda 15y agoOnly if buying the insurance was cheaper than the carry from owning the bonds. There's no reason that this should be a 'free lunch'. Indeed, CDS, the bonds, and the market for short-selling the bonds, form a no-arbitrage kind of thing : So that no one makes money without risk.
- tomkarlo 15y agoWhy is buying unhedged CDS an amoral act? Is shorting a stock amoral? You shouldn't have to own a security to buy the default insurance on it, any more than you should have to buy a stock to own puts on it. It's a contract between two educated and willing counterparties. A bank might be short Greek debt because of other trading positions, and want to sell Greek CDS to balance that position. Restricting who can buy that security hinders it being priced right.
- mdda 15y agoI actually stated the opposite : People might use this as an example of how amoral hedgefunds are, but it turns out that they are just more clearsighted. Ditto shorting, HFT, etc.