I consider imsaguy to be one of the most trustworthy people in the community, so have no qualms taking on some of his default risk.
I pay you 100 btc and this is all I get? I want a refund. I'll see you in #bitcoin-court.
Topic: Why you might want to sell Credit Default Swaps - page 2. (Read 3847 times)
I pay you 100 btc and this is all I get? I want a refund. I'll see you in #bitcoin-court.
By now many of you will have seen my sale of CDSes on imsaguy. I just wanted to elaborate on why doing this doesn't make me insane.
Basically, you turn into an insurance company, with all the pros and cons that come with that. The CDS itself is a little more nuanced than straight-up insurance, but the risk/return profile of the CDS seller is about the same.
Think about how much you pay to insure your car, or your house, or your health. It's probably a lot of money, right? And the companies selling you the insurance, most of the time, just sit back and enjoy the cashflow. On the other hand, they're exposed to what is typically called "tail risk" in financial lingo, meaning that they occasionally suffer big losses (when claims must be paid).
Life insurance for 70+-year-olds might be a scary business to get into, but health insurance on young healthy people carries low risk (and lower returns, obviously) but provides some nice steady cashflow for doing very little. Want to supplement your income? Sell catastrophic meteorite insurance!
I consider imsaguy to be one of the most trustworthy people in the community, so have no qualms taking on some of his default risk. Depending on your risk tolerance, you might want to sell CDSes on much riskier loans (much larger spreads mean much more regular income for you), but that's really up to you and your perception of the creditworthiness of the reference entity.
Anyway, my point is basically that selling CDSes can give good, steady income, at the expense of increased tail risk. Furthermore, you can actually be doing other things with the money you're liable for during the term of the CDS, which wouldn't be the case if you the loan directly. Of course, doing this exposes you to currency risk too (if you lose the coins you're liable for, and your reference entity defaults, you'll need to buy more coins to cover your debt).
From the larger community's perspective, this will allow lenders to reduce their risk by paying someone else to take it on, thus making the market a bit more mature (http://charleshughsmith.blogspot.com/2012/03/in-praise-of-hedging.html) and giving people more ways to protect their investments. It also gives us a way (whose validity is certainly arguable) to quantify the community's perceived risk on loan defaults, which might help in the longer run.
I'm definitely not advocating that anyone do this unless they fully understand the risks involved. Most of the time selling a CDS is just "free money", if you do it right, but you need to be able to cover the losses if things go down the drain. As always, this is not investment advice and all the usual no liability bullshit, but I think it could be a good deal for some people.
So, read up on http://en.wikipedia.org/wiki/Credit_default_swap and feel free to ask questions here about how they work. Surely I can't be the only one with the guts to try this around here, right?
tl;dr: no, definitely not. This is stuff you definitely need to understand well before undertaking the risk
Basically, you turn into an insurance company, with all the pros and cons that come with that. The CDS itself is a little more nuanced than straight-up insurance, but the risk/return profile of the CDS seller is about the same.
Think about how much you pay to insure your car, or your house, or your health. It's probably a lot of money, right? And the companies selling you the insurance, most of the time, just sit back and enjoy the cashflow. On the other hand, they're exposed to what is typically called "tail risk" in financial lingo, meaning that they occasionally suffer big losses (when claims must be paid).
Life insurance for 70+-year-olds might be a scary business to get into, but health insurance on young healthy people carries low risk (and lower returns, obviously) but provides some nice steady cashflow for doing very little. Want to supplement your income? Sell catastrophic meteorite insurance!
I consider imsaguy to be one of the most trustworthy people in the community, so have no qualms taking on some of his default risk. Depending on your risk tolerance, you might want to sell CDSes on much riskier loans (much larger spreads mean much more regular income for you), but that's really up to you and your perception of the creditworthiness of the reference entity.
Anyway, my point is basically that selling CDSes can give good, steady income, at the expense of increased tail risk. Furthermore, you can actually be doing other things with the money you're liable for during the term of the CDS, which wouldn't be the case if you the loan directly. Of course, doing this exposes you to currency risk too (if you lose the coins you're liable for, and your reference entity defaults, you'll need to buy more coins to cover your debt).
From the larger community's perspective, this will allow lenders to reduce their risk by paying someone else to take it on, thus making the market a bit more mature (http://charleshughsmith.blogspot.com/2012/03/in-praise-of-hedging.html) and giving people more ways to protect their investments. It also gives us a way (whose validity is certainly arguable) to quantify the community's perceived risk on loan defaults, which might help in the longer run.
I'm definitely not advocating that anyone do this unless they fully understand the risks involved. Most of the time selling a CDS is just "free money", if you do it right, but you need to be able to cover the losses if things go down the drain. As always, this is not investment advice and all the usual no liability bullshit, but I think it could be a good deal for some people.
So, read up on http://en.wikipedia.org/wiki/Credit_default_swap and feel free to ask questions here about how they work. Surely I can't be the only one with the guts to try this around here, right?
tl;dr: no, definitely not. This is stuff you definitely need to understand well before undertaking the risk
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