Case 5: Jason Sterling and the Sovereign Debt Crisis
Mengdi Huang
Lujiao Shi
Trenton Cummins
1.What position should Jason Sterling take on European sovereign debt? Why? What are the advantages/disadvantages of using credit default swaps to profit from this crisis? What are the potential risks? Are there any lessons for Jason that can be gleaned from previous crises?
Jason Sterling want to find new information that can let him trade on before the close of trading for the week because the emerging sovereign debt crisis in Europe would be a primary topic among the worldwide leaders and bankers. He needs to find whether the European leaders could find the solution to the crisis. If he expected the leader could find the solution, then he should take the buying position. Conversely, if the solution cannot be came up in future, the sovereign debt market could be thrown into turmoil. Then Jason should not take the buying position.
The advantage of using credit default swaps is securing the risks of buyers during the trading. Because of the exposure would be limited only to the periodic premiums instead of to any potential increase in bond prices. While the disadvantage of credit default swaps is when a nation that he purchased a CDS defaulted, Jason would receive a lump sum payment. If he were to sell a CDS, his fund would receive the periodic payments and would have to pay if the issuer’s assets default. So the potential risk is when the credit event default, the CDS issuers cannot afford the payment to the buyers. From the Greece’s crisis, it faced deficits, increasing interest payments, and the prospect of having to default on debt.
4.How do the ESM and EFSF address the sovereign debt crisis? What issues do they miss?
To address the sovereign debt crisis, European Stabilization Mechanism (ESM) allowed the European Commission to raise funds by issuing bonds that using its own budget as collateral and then forwarding those funds on to struggling nations. European Financial Stability Facility (EFSF) issued bonds and
Lujiao Shi
Trenton Cummins
1.What position should Jason Sterling take on European sovereign debt? Why? What are the advantages/disadvantages of using credit default swaps to profit from this crisis? What are the potential risks? Are there any lessons for Jason that can be gleaned from previous crises?
Jason Sterling want to find new information that can let him trade on before the close of trading for the week because the emerging sovereign debt crisis in Europe would be a primary topic among the worldwide leaders and bankers. He needs to find whether the European leaders could find the solution to the crisis. If he expected the leader could find the solution, then he should take the buying position. Conversely, if the solution cannot be came up in future, the sovereign debt market could be thrown into turmoil. Then Jason should not take the buying position.
The advantage of using credit default swaps is securing the risks of buyers during the trading. Because of the exposure would be limited only to the periodic premiums instead of to any potential increase in bond prices. While the disadvantage of credit default swaps is when a nation that he purchased a CDS defaulted, Jason would receive a lump sum payment. If he were to sell a CDS, his fund would receive the periodic payments and would have to pay if the issuer’s assets default. So the potential risk is when the credit event default, the CDS issuers cannot afford the payment to the buyers. From the Greece’s crisis, it faced deficits, increasing interest payments, and the prospect of having to default on debt.
4.How do the ESM and EFSF address the sovereign debt crisis? What issues do they miss?
To address the sovereign debt crisis, European Stabilization Mechanism (ESM) allowed the European Commission to raise funds by issuing bonds that using its own budget as collateral and then forwarding those funds on to struggling nations. European Financial Stability Facility (EFSF) issued bonds and