Citi plans crisis derivatives

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.

"The great thing about the index is that it hedges your funding costs while being very simple to trade. I believe it will reduce the systemic risk in the industry, akin to how the advent of swaps means people don't worry about interest-rate exposures any more – they just pay a fee to hedge it," he says
http://www.risk.net/risk-magazine/news/1590861/citi-plans-crisis-derivatives

:nuke:

why not create more toxic credit vehicles and continue to foul an already entirely corrupted system? :sarcasm:

Obama and crew better put together a liquidation process asap before the next crisis or he will get 100% of the blame for the next bailout of wallstreet fat cats.

But after seeing his Clinton-Republican appointments, I lost all hope. The media will blame him no matter what and he will not fight back. They will tank him no matter what, it a sure bet. He needs to reform media to prevent anything. And he wont.

Only thing that bodes well in the land of Baby Huey is Ellen's huge Talk Show contract renewal. Now THAT gives me hope!

:sarcasm:

Once you have "hedges for hedges", can "hedges for hedges for hedges" be far behind?

what I've been pondering lately is that whenever you get to "bet on" bad outcomes, there is the potential for incentive mis-alignment. In the case of individual insurance, my potential incentive mis-alignments (like taking out fire insurance on my house and then setting it on fire) are counterbalanced by the fact that I can be investigated effectively for fraud.

Does anybody have the ability to investigate Our Bankster Masters Of The Universe, effectively, for fraud? Little things like surreptitiously engineering bubbles and collapses of credit markets? Or Greece?

Your focus on the betting aspect is the right one, in my view, they should keep the gambling in Las Vegas and Atlantic City, it's no way to manage an economy.