I
Ivanhoe
Member
April 2009 q2 Part iv
TrustUs Bank runs into financial difficulty and is declared bankrupt. The trading desk has several over-the-counter (OTC) forward contracts, options, credit default swaps and total return swaps in place where TrustUs Bank is the counterparty.
(iv) Describe the likely losses the trading desk will incur as a result of this
bankruptcy.
Part of the response
There is potentially a significant delay in getting any assets back from the
bankruptcy proceedings, which means the trading desk could be forced to
unwind some of their current trades (as any capital loss will increase the
overall leverage used in the strategy), potentially resulting in additional losses.The loss potentially increases if some or all of the assets are illiquid.
[/B]
I did not quite understand accurately what the portion highlighted in bold means. Could you please explain?
Also, in the same problem, could convertible bond arbitrage be a strategy of being long on the underpriced one and short on the overpriced one?
TrustUs Bank runs into financial difficulty and is declared bankrupt. The trading desk has several over-the-counter (OTC) forward contracts, options, credit default swaps and total return swaps in place where TrustUs Bank is the counterparty.
(iv) Describe the likely losses the trading desk will incur as a result of this
bankruptcy.
Part of the response
There is potentially a significant delay in getting any assets back from the
bankruptcy proceedings, which means the trading desk could be forced to
unwind some of their current trades (as any capital loss will increase the
overall leverage used in the strategy), potentially resulting in additional losses.The loss potentially increases if some or all of the assets are illiquid.
[/B]
I did not quite understand accurately what the portion highlighted in bold means. Could you please explain?
Also, in the same problem, could convertible bond arbitrage be a strategy of being long on the underpriced one and short on the overpriced one?