Comments on: The HP capital-structure arbitrage http://blogs.reuters.com/felix-salmon/2012/08/01/the-hp-capital-structure-arbitrage/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: TFF http://blogs.reuters.com/felix-salmon/2012/08/01/the-hp-capital-structure-arbitrage/comment-page-1/#comment-42210 Wed, 01 Aug 2012 22:27:45 +0000 http://blogs.reuters.com/felix-salmon/?p=16755#comment-42210 Yeah, I think you are right. Might need to update regulation to handle CDS, though. They aren’t quite congruous to options.

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By: dvolatility http://blogs.reuters.com/felix-salmon/2012/08/01/the-hp-capital-structure-arbitrage/comment-page-1/#comment-42209 Wed, 01 Aug 2012 21:39:59 +0000 http://blogs.reuters.com/felix-salmon/?p=16755#comment-42209 @TFF Isn’t that point of having margin calls?

Reuters has HP options trading right here. http://www.reuters.com/finance/stocks/op tion?symbol=HPQ.N&expDate=11/2012

For example, there are 24,000 Nov 17 puts open. Like CDS players, that probably involved a large buyer and seller of put insurance that has the option to sell a couple million shares at $17 if the stock was in the $ by Nov, right? Or sell the insurance to someone else. That seems like real money, and it’s a transparent, more liquid market that is available to anyone. There are even 6,606 $18 puts and 2,944 $15 puts open that expire in January 2014 http://www.reuters.com/finance/stocks/op tion?symbol=HPQ.N&expDate=1/2014

Someone could buy or sell 1 put tied to 100 shares but can’t do that with CDS referencing bonds. Or be able to do what this post says. By the way, these funds were doing arbitrage with synthetic MBS CDOs and were mispricing risk. Seeing some CDS rates (spreads) online is a move in the right direction. My most popular blog post has been links to CDS, which shows how opaque this market is and that people are interested. You see options blogs all around the internet analyzing stock and option activity. The same should be done with bonds and bond options or CDS volatility. I don’t understand why bond and CDS notional values aren’t cut down (par value). It seems like all of those unsecured exchange traded GM mini-bonds could have had an active insurance market of some sort.

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By: dvolatility http://blogs.reuters.com/felix-salmon/2012/08/01/the-hp-capital-structure-arbitrage/comment-page-1/#comment-42208 Wed, 01 Aug 2012 20:41:23 +0000 http://blogs.reuters.com/felix-salmon/?p=16755#comment-42208 @TFF credit default swaps are to credit as options are to equities. Right?

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By: TFF http://blogs.reuters.com/felix-salmon/2012/08/01/the-hp-capital-structure-arbitrage/comment-page-1/#comment-42205 Wed, 01 Aug 2012 19:01:56 +0000 http://blogs.reuters.com/felix-salmon/?p=16755#comment-42205 @dvolatility, doesn’t a CDS depend on knowing/trusting your counterparty? Hard to have an active exchange when you have a dozen different counterparties writing coverage on the same security.

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By: dvolatility http://blogs.reuters.com/felix-salmon/2012/08/01/the-hp-capital-structure-arbitrage/comment-page-1/#comment-42204 Wed, 01 Aug 2012 18:56:10 +0000 http://blogs.reuters.com/felix-salmon/?p=16755#comment-42204 Bloomberg.com has the HP 5Y credit default swap price available for the public to see http://www.bloomberg.com/quote/CHWP1U5:I ND/chart. It went from 100 to 300bps (1% to 3%) so far in 2012. You can also find the notional value outstanding on the DTCC’s website somewhere http://www.dtcc.com/. All of these swaps referencing public company securities should be on public exchanges w/ price and open interest (notional values) available for the public to trade or at least watch. The equity options market is available on discount brokerages and has data on Google and Yahoo Finance. So, why isn’t there an active exchange traded mini-bond market with options to hedge?

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By: sagreer70 http://blogs.reuters.com/felix-salmon/2012/08/01/the-hp-capital-structure-arbitrage/comment-page-1/#comment-42199 Wed, 01 Aug 2012 17:58:54 +0000 http://blogs.reuters.com/felix-salmon/?p=16755#comment-42199 As has been revealed over the past half-decade, the vast majority of this arbitrage does nothing, zilch, zip, nada, for the economy. It is simply Vegas-style betting, not tied to anything useful to the economy other than the potential of winning or losing a bet.

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By: TFF http://blogs.reuters.com/felix-salmon/2012/08/01/the-hp-capital-structure-arbitrage/comment-page-1/#comment-42198 Wed, 01 Aug 2012 17:53:28 +0000 http://blogs.reuters.com/felix-salmon/?p=16755#comment-42198 @AngryInCali, it may be a bet that the bond market is irrationally underpricing the risk while the stock market is irrationally overpricing the risk. Either bet alone (long stock, short bond) would be risky but profitable on average. Combining the two gives you a less risky trade that remains similarly profitable on average.

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By: AngryInCali http://blogs.reuters.com/felix-salmon/2012/08/01/the-hp-capital-structure-arbitrage/comment-page-1/#comment-42194 Wed, 01 Aug 2012 17:13:11 +0000 http://blogs.reuters.com/felix-salmon/?p=16755#comment-42194 I’d like to see the model that allows the stock price to plummet when there is a risk of future collapse, but leaves the bond price unaffected. Do they expect equity owners to get wiped out, but bond holders to remain whole?

There’s a step missing from your logic. I’m not saying it isn’t there (e.g. if HP pays no dividends, money might be flowing into the bonds instead of the stock), but your theory doesn’t explain the bond yields.

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By: InfiniteThought http://blogs.reuters.com/felix-salmon/2012/08/01/the-hp-capital-structure-arbitrage/comment-page-1/#comment-42192 Wed, 01 Aug 2012 16:42:54 +0000 http://blogs.reuters.com/felix-salmon/?p=16755#comment-42192 Thanks for the note that gives us insight into the ways that our financial system works.

My question is this: How does this hedging/CDS help the real economy? What value has this financial transaction added to the economy?

The way i see it, the financial market is siphoning off a lot of money in the name of market making and this upward movement of money without creating any value and based on arbitrage is the bane of the current global stagnation or liquidity trap as Paul Krugman calls it.

It is shocking that governments are not ready to step in and call for a roll back in CDS and other synthetic financial instruments even after the disaster of 2008. What a shame!

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