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CDS: It Gets Liquid When It Gets Hot

11 February 2015 by lberuti

Over the last 6 months, macroeconomic have played an overwhelming role in the behaviour of risky assets’ price. Russia, Greece, Oil prices, Quantitative Easing have dominated the headlines and they have largely driven the market ups and downs. That said, idiosyncratic news have also played their part for a few names. For instance TSCOLN ( Tesco Plc) has been regularly under the spotlight since they identified accounting irregularities back in September 2014. It is quite striking that not only TSCO’s 5 year risk premium has moved meaningfully when there was some new information reaching the market, but that traded volumes also increased significantly around these dates. Rather than selling bonds which can prove tricky to replace afterwards, CDS provides investors with an efficient and liquid hedging instrument when they expect a bumpy ride on a given credit.