Author Topic: Good blog post on FFH  (Read 45007 times)

obtuse_investor

  • Sr. Member
  • ****
  • Posts: 384
Re: Good blog post on FFH
« Reply #160 on: August 28, 2014, 06:45:48 AM »
http://www.tijd.be/nieuws/politiek_economie_belgie/Belgie_staat_op_de_rand_van_de_deflatie.9538528-3136.art

Sorry, it's in Dutch. Belgian "inflation" at 0.02% in August.

Seems more and more likely Prem will be proven right.

Feels that way, and a lot of commodities point that way too.   The options are a way off strike, but my understanding is that their price can rise in the market regardless.

That is my understanding too. If and when the deflation expectations become the norm, then the market will discount that. That is when these defaltion swaps will shine. We don't have to see actual deflation ever be all that low for these swaps to pay off big.

Today's expectations are that ECB's Draghi has a bazooka in his backpocket with a QE sticker on it.
Value Investor who manages his personal portfolio with a 25-45 year time horizon | @obtuse_investor


benhacker

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 882
Re: Good blog post on FFH
« Reply #161 on: August 28, 2014, 08:59:54 AM »
Quote
Feels that way, and a lot of commodities point that way too.   The options are a way off strike, but my understanding is that their price can rise in the market regardless.

That is my understanding too. If and when the deflation expectations become the norm, then the market will discount that. That is when these defaltion swaps will shine. We don't have to see actual deflation ever be all that low for these swaps to pay off big.

Today's expectations are that ECB's Draghi has a bazooka in his backpocket with a QE sticker on it.

I think there are two elements to this:

1) Obviously, if the market starts desiring deflation protection, FFH's derivatives may be able to be sold high (even before deflation actually occurs).

2) The valuation of the deflation derivatives on FFH's books, are unlikely to have large M2M swings in value if deflation FEARS are high, but inflation remains positive.  I may be wrong on this, but FFH seems to be valuing the entire deflation swap bucket as Level 3 assets, and their model doesn't seem to be related at all to dealer quotes, and it much more conservative than what they have been paying (I haven't checked recently, but historically they had several swap purchases that were marked down (by model) 50% within one month in an environment where deflation and deflation expectations weren't changing.).  So I would assume, unlike CDS which have significant observable inputs into their prices (corporate bonds do trade frequently, and are strongly related to CDS), the deflation derivatives will be marked conservatively based off models... until they are sold or expire.

I could be wrong, and certainly level 3 assets have a lot of flexibility in how FFH could value them...
« Last Edit: September 24, 2014, 02:37:22 PM by benhacker »
Ben Hacker
Beaverton, Oregon - USA