A swap designed to transfer the credit Risk of fixed income securities between parties
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Tuesday, August 4, 2009
CDS
A swap designed to transfer the credit Risk of fixed income securities between parties
A credit default swap (CDS) is a contract between two parties where a protection buyer pays a premium to the protection seller in exchange for a payment if a credit event occurs to a reference entity.
A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument -- typically a bond or loan -- goes into default (fails to pay).
CDS are typically 5 year contracts, although 3, 7, and 10 year contracts are also traded.
Monday, July 27, 2009
Currency Carry Trade
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate.
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Currency Carry Trade
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.
Take example of a "yen carry trade": a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into INR Rupees and buys a bond for the equivalent amount. Let's assume that the bond pays 6.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 6.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then he can stand to make a profit of 65%.
The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the INR Rupees were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.
Take example of a "yen carry trade": a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into INR Rupees and buys a bond for the equivalent amount. Let's assume that the bond pays 6.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 6.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then he can stand to make a profit of 65%.
The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the INR Rupees were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.
Sunday, July 26, 2009
Money Market
What Does Money Market Mean?
A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year.
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A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year.
For Further reading Click Here
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