Dear David,
I’ve had some confusion, misunderstanding and doubts when doing 09 Level II Annotated Power Practice. Appreciate your kind help on this!
In the answer to question 46c (see below), can I use long a call if not using long a put as long a call is also benefiting from increase equity volaitlity? If not, is it because that long a call and short a CDS is not an capital arbitrage: short a CDS is long the credit but long a call is short the credit?
46c. What is the capital arbitrage trade if the manager views the implied volatility in the equity market as too low compared with the credit risk? Short a CDS (sell protection) plus long a put on company’s stock. If the manager deems the implied volatility in equity markets as low, he/she buys a put (the put increases in value as volatility increases) and the short protection is to be synthetically long the company’s credit (i.e., to reflect the view that the credit spread is too high).
Thank you for your enlightenment and correction!
Cheers
Liming
16/11/09
I’ve had some confusion, misunderstanding and doubts when doing 09 Level II Annotated Power Practice. Appreciate your kind help on this!
In the answer to question 46c (see below), can I use long a call if not using long a put as long a call is also benefiting from increase equity volaitlity? If not, is it because that long a call and short a CDS is not an capital arbitrage: short a CDS is long the credit but long a call is short the credit?
46c. What is the capital arbitrage trade if the manager views the implied volatility in the equity market as too low compared with the credit risk? Short a CDS (sell protection) plus long a put on company’s stock. If the manager deems the implied volatility in equity markets as low, he/she buys a put (the put increases in value as volatility increases) and the short protection is to be synthetically long the company’s credit (i.e., to reflect the view that the credit spread is too high).
Thank you for your enlightenment and correction!
Cheers
Liming
16/11/09
