4

You would need to provide more details for an accurate PnL attribution. However, here are some additional points to consider that might help. When you sold protection, you effectively became long the 5Yr synthetic debt of the reference entity at a credit spread of 190bps. Since the coupon is 5%, this would imply a 5Yr (at the coupon frequency of the ...


2

Every 6 months, there is a new series of an index (usually with slightly different names). The "on the run" series (maturing on IMM date 5 years from now) is the most liquid. "Off the run" series (maturing on IMM dates 4.5, 4, 3.5, etc years from now) are much less liquid with wider bid-ask spread than on-the-run one. In 2012 Bruno Iksil (aka London Whale) ...


2

Yes, 42.520bp means its the spread of the CDS. The lower the CDS, the lower the premium of the sovereign entity and the less likely it will default. This is overly simplistic but gives you a sense of where the CDS comes from: Expected Loss = Probability of Default * (1 - Recovery Rate) * Default Exposure. The expected loss is the CDS premium you have to ...


2

A CDS would not be a good instrument to hedge this kind of credit risk for the following reasons: 1 CDS is traded by two counterparites that have an ISDA agreement. Most participants in this space don't. 2 CDS are traded on a relatively small number of most liquid corporate reference entities. If you want to trade a CDS on an illiquid name, it would be ...


2

Maybe some do but I believe it’s rare because it’s not practical: CDS are traded for a limited amount of companies and CDS might not protect against late or non payment. What is more commonly done is that vendors buy trade credit insurance from insurance companies such as Euler Hermes, Coface or Atradius. Disclosure: I work for Atradius.


1

@AlRacoon was completely right by suspecting convexity for this issue. The Chart below shows the impact of the convexity in this trade very well.


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