I just read an article from the BIS website (looks like it may have been written by S&P) and something seemed very backwards to me. I was hoping someone might be able to clarify part of it.
This was an article that discussed the leverage ratio. It stated that when a firm is SELLING credit derivatives, it must count the NOTIONAL amount of protection SOLD as an ASSET.
The idea behind the leverage ratio makes perfect sense and even why we should consider the notional in this instance, but the idea that this notional is an ASSET makes absolutely no sense to me. Any protection sold would be a liability, because it is money that would have to be paid out under certain circumstances. Am I missing something here?
Thanks!
Shannon
This was an article that discussed the leverage ratio. It stated that when a firm is SELLING credit derivatives, it must count the NOTIONAL amount of protection SOLD as an ASSET.
The idea behind the leverage ratio makes perfect sense and even why we should consider the notional in this instance, but the idea that this notional is an ASSET makes absolutely no sense to me. Any protection sold would be a liability, because it is money that would have to be paid out under certain circumstances. Am I missing something here?
Thanks!
Shannon
