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SVTPerformance's Chain of Restaurants
Road Side Pub
SVB is Now In the Hands of the FDIC
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<blockquote data-quote="Klaus" data-source="post: 16895081" data-attributes="member: 190070"><p>It's not DB that is paying. CDS allows others to take a position on the probability of default. </p><p></p><p>Anyone with an ISDA can buy or sell this risk. Long explanation, Google ISDA if you are interested. </p><p></p><p>Speculators might do this but counterparties might to. </p><p></p><p>Say you have lent a huge amount to DB and you are worried that they go BK before they pay you. You can buy CDS to hedge this risk. </p><p></p><p>Say you are a hedge fund and you think the price of German Bunds will blow out if the state has to save DB. You buy CDS to hedge this risk. </p><p></p><p>Say you think DB stock is cheap relative to the bonds. You sell CDS and use the income from that sale to purchase stock. </p><p></p><p>Say you think Credit Suisse bonds are rich relative to DB bonds. You sell CDS on DB and buy CDS on CS. </p><p></p><p>etc</p><p>etc</p><p>etc</p><p></p><p>The graph shows the cost of buying DB CDS. The cost is a function of the probability of default. The market now thinks the liklyhood of a DB default exceeds 2008.</p></blockquote><p></p>
[QUOTE="Klaus, post: 16895081, member: 190070"] It's not DB that is paying. CDS allows others to take a position on the probability of default. Anyone with an ISDA can buy or sell this risk. Long explanation, Google ISDA if you are interested. Speculators might do this but counterparties might to. Say you have lent a huge amount to DB and you are worried that they go BK before they pay you. You can buy CDS to hedge this risk. Say you are a hedge fund and you think the price of German Bunds will blow out if the state has to save DB. You buy CDS to hedge this risk. Say you think DB stock is cheap relative to the bonds. You sell CDS and use the income from that sale to purchase stock. Say you think Credit Suisse bonds are rich relative to DB bonds. You sell CDS on DB and buy CDS on CS. etc etc etc The graph shows the cost of buying DB CDS. The cost is a function of the probability of default. The market now thinks the liklyhood of a DB default exceeds 2008. [/QUOTE]
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SVTPerformance's Chain of Restaurants
Road Side Pub
SVB is Now In the Hands of the FDIC
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