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CMA adds quanto data to sovereign CDS pricing
Friday, September 9, 2011
Credit pricing provider CMA has announced that it has added quanto spreads for sovereigns to its Datavision service. The data shows the market-implied expectation of devaluation risk in the event of a default for eurozone sovereigns. Eurozone sovereign credit default swaps are traded in dollars (and USA credit default swaps are traded in euros) so that protection buyers avoid taking a currency hit in the event of a sovereign default. However, investors need to take this currency mismatch into account when marking their credit default swaps to market.
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Structured
Issuers
CFlux secondary
CLO index levels:
| Index | 21 May |
|
| CFlux USD AAA | ↑ | 96.2 |
| CFlux USD AA | ↑ |
88.3 |
| CFlux USD A | ↓ | 84.1 |
| CFlux USD BBB | ↓ | 75.3 |
| CFlux USD BB | ↓ |
74.1 |
| CFlux USD EQ | ↑ | 77.5 |
Why should the euro devaluate if and when it manages to get rid of Greece, Spain and co? It would actually look more like the Swiss Franc.
It could indeed be that the reason why European Sov CDS is usually traded in dollars is due to heavily sophisticated trading desks doing quantos. Alternatively one could come to the conclusion that most of these trades are done not for hedging but by usd denominated hedge funds that are just betting on sovereign defaults and do not want any euro currency exposure