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Strategies & Market Trends : BAK - Investing -- Ignore unavailable to you. Want to Upgrade?

To: alertmeipp who wrote (2626)	5/13/2012 8:00:17 AM
From: normlasky	2 Recommendations Read Replies (1) \| Respond to of 3249

Re: JPM Looks to me to be prop trade. Selling protection hedges what? Based on info from Felix Salmon (below) it appears to be a very dumb trade. So not only was the trade too big, the economics were awful. This is a double reason for Dimon to be so pissed off. Chart below shows that in January 2012 the cds of the individual components of the cdx na ig (north america investment grade) index (125 companies) was selling in aggregate at a 70 bsp premium to the index. Obvious arbitrage. Buy the individual components and short the index. Apparently, a lot of folks did this because the spread dropped to 30 bsp - even though the cdx na ig index increased significantly over 3 months, cds prices of the individual components increased at a faster rate. So the market traded away from Jpm. Question to Iskil is why did you fuel the arbitrage by selling index na ig cds instead of taking advantage of the arbitrage. Apparently there is mucho liquidity for the individual components. This is one way for jpm to unwind some the trade should it choose. Jpm would still have unrealized losses but if it held the position long enough the net would turn profitable as the contracts expired assuming no counter-party risk. blogs.reuters.com