Posted on 02/09/2010 8:06:43 AM PST by TigerLikesRooster
Citi plans crisis derivatives
Author: Laurie Carver
Source: Risk magazine | 08 Feb 2010
Categories: Derivatives
Topics: Citi, hedging, liquidity crisis bankrupt
Credit specialists at Citi are considering launching the first derivatives intended to pay out in the event of a financial crisis. The firm has drawn up plans for a tradable liquidity index, known as the CLX, on which products could be structured that allow buyers to hedge a spike in funding costs.
Like the untraded US rates liquidity index (USRLI), the CLX is constructed as a sum of the Sharpe ratio – deviations from the mean divided by volatility – of various market factors, such as equity volatilities, Treasury rates, swap spreads, corporate bond swaption-implied volatilities, and structured credit spreads. Citi will make the CLX tradable by using fixed historical values for the mean and volatility parameters, eliminating the need for costly recomputation from lengthy time series.
Although the design of the index serves as a proxy measure for liquidity, Terry Benzschawel, a managing director of quantitative credit trading strategy at Citi in New York and head of the team researching the product, says it also tracks more traditional measures such as bid-ask spreads, trading volumes and the USRLI. He compares the potential impact of CLX to that of the interest rate swaps market.
(Excerpt) Read more at risk.net ...
P!
They never STOPPED playing with fire, especially if the commissions are high enough.
No worries. If they get upside down, the tax payers will bail them out again.
This is destined to fail for two reasons: 1. Citi is an incompetent organization. Look at EVERY single financial scandal and disaster in the last 30 years, and you’ll see Citi was involved. 2. If financial disaster does happen and you look to get paid off, you’ll find that your counterparty is broke and can’t pay (like what happened with AIG).
ping Just friggin great we still own the majority of citi fraud so we will no doubt have to pick up the tab again that investment they made in zero is really paying off.
Does it matter? There are currently $300 Trillion in derivatives outstanding. I don’t see what adding more could do.
Market goes up, you pay us. We win. Market goes down, the FED will bail you out. The taxpayers lose.
This isn't fire. This is arson to make a fraudulent insurance claim, after they have taken their commission for selling the policy.
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