Credit default swap (CDS) basis trade

The CDS basis trade exploits a difference between the cash and synthetic markets.

Big bets on an obscure index lay at the heart of JPMorgan’s losses this week. Sr. Producer Paddy Hirsch explains how an index of CDS works.
Video Rating: 4 / 5

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23 Responses to “Credit default swap (CDS) basis trade” Subscribe

  1. MrStaff50 June 11, 2013 at 12:14 pm #

    The reason you do this trade is if go long the bond at a discount you may not get any cash flow, but when the bond matures it’s going to pay off at full face value. So you get the insurance at no cost, you are protected against default and you reap a RISK FREE profit at maturity………beautiful plan.

  2. Kewal Mehra June 11, 2013 at 12:54 pm #

    whts point in investing when investor is not earning anything?

  3. austin292100 June 11, 2013 at 1:47 pm #


  4. saigin June 11, 2013 at 2:27 pm #

    thank you for this explanation….there’s one gap in my understanding though. as an investor, why would one enter a positive scenario? i imagine the whole incentive for purchasing a bond is to have net positive cash flow from the interest. buying protection for more than the bond interest seems counter-intuitive…can you please help me understand the incentive for the investor in this scenario? thx

  5. dreamsandcream June 11, 2013 at 2:42 pm #

    thanks that was great

  6. saraabsar June 11, 2013 at 2:59 pm #

    can you please also do CDS (options trade)?

  7. LuvLondon2010 June 11, 2013 at 3:52 pm #

    if i get through my internship all right, you’re part of success! x

  8. bionicturtledotcom June 11, 2013 at 4:44 pm #

    that’s correct, in the “no aribtrage” (no basis trade or carry = 0), the bond yields +5% but it costs -2% to fund the purchase of the bond; i.e., naked bond = +3% net spread. Then investor hedges default by purchasing CDS at cost of 3% which brings carry to zero. So: +5 bond spread – 2% borrowing – 3% CDS = 0.

  9. talebi818 June 11, 2013 at 5:31 pm #

    So the investor is still getting the 5% yield even though he lost 2% from the repo and lost the 3% for the CDS?

  10. doyouseetheirony June 11, 2013 at 6:06 pm #

    If you could do a video on Enron and there financial schemes you would be amazing. I am playing Andy Fastow in a play based upon the crisis and would love you explanations to help my Research.

  11. dunk1978banker June 11, 2013 at 6:37 pm #

    great vid. 

  12. 010vision June 11, 2013 at 7:12 pm #

    What they do is privatize the gains socialize the losses.

    In other words THEY ROB EVERYONE

  13. Mahen Nowzadick June 11, 2013 at 7:56 pm #

    Lets bet against JP Morgan, who says JP Morgan is going the way of Lehman Brothers ?

  14. yo1dude1man June 11, 2013 at 8:06 pm #

    So are we looking at MORE Bailout for JPMorgan?

  15. MrHoppers002 June 11, 2013 at 8:25 pm #

    2 billion dollars is nothing to jp morgan chase. They have a 14 billion dollar operating income in a year.

  16. gigante87 June 11, 2013 at 8:42 pm #

    privatize the gains socialize the losses

  17. theslimeylimey June 11, 2013 at 8:55 pm #

    These videos are great! I think there would be many more people watching if they new about them.

  18. westin1985 June 11, 2013 at 9:21 pm #

    This is how they funnel money out the banks to the elites. When the banks go broke, the govt has to supply the bailout money to the banks or the system starts a cascading effect. This is how the system will go down in flames. Its totally rigged this way. Yea the  elites will milk the system for as long as possible by making the market take little nose dives. The final nose dive will end in a big market crash.

  19. kapamagicman June 11, 2013 at 10:04 pm #

    Paddy you’re awesome. Please keep posting videos that are related to the financial markets. You do an amazing job explaning these concepts.

  20. cwaddle June 11, 2013 at 10:27 pm #

    cds is simply zero sum. JP morgan’s loss is somebody’s gain and i think it’s justice served

  21. gateguardia June 11, 2013 at 11:07 pm #

    agreed, Paddy is a super handsome guy

  22. Robb Kemp June 11, 2013 at 11:54 pm #

    who do they bet against?

  23. drmkkk June 12, 2013 at 12:20 am #

    u r so handsome :)

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