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07-06-2012, 03:16 PM #11
07-06-2012, 04:33 PM #122008 Honda Accord Coupe
07-06-2012, 05:12 PM #13
From what it sounds like... they were being pigs... and we all know what happens to pigs in the markets.BMW 335 6MT
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07-09-2012, 04:16 AM #14Member
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- Aug 2010
I will give it a shot.
We know that a a bank of JPM's magnitude has a lot of credit exposure. A CDS is an insurance policy on corporate debt. The IG9 is a CDS Index(CDX.) JPM was long the IG9 out to 2017. This means they wanted protection on corporate debt through 2017. It is worth noting that the IG9 is a bit outdated. JPM is hoping that the IG9 will correlate with the specific credit risks they are exposed to. Now take a look at how the economy looked at the end of 2011 and beginning of 2012. There was a lot of optimism and generally positive economic reports. This was preceeded by a very gloomy period for our economy. What JPM may have found is that the amount of protection they bought with the IG9 index was too large a hedge for the risk they were exposed to, given the new positive outlook. They likely saw that the position was losing money because of this, and decided to hedge their hedge. They did this by selling tranches of the IG9. We then saw the economic outlook turn more bleak, so the tranches they sold(shorted) started losing money for them. I believe at some point they decided to cut their losses and exit the position. At this point I think a counterparty to the trade figured out what was going on and leaked the information, which left JPM stuck holding a bag so to speak.