20181029-法国巴黎银行-BRAZIL_Strategy__Take_profits_on_short_5y_CDS_8页_966kb

Trade Idea Summary: Brazil 5y CDS Strategy (29 October 2018)

Core Content

This document outlines a trade idea for shorting the 5-year Credit Default Swap (CDS) on Brazil, based on a newly introduced model for assessing the fair value of CDS. The strategy is part of the Emerging Markets (EM) team at BNP Paribas, specifically the FX & IR Latin America Strategy and Commodity Quant Strategy teams.

Key Messages

• Trade Execution: The team initiated a short Brazil 5y CDS at 273bp with a target of 200bp. The target was successfully breached today.
• Profit Taking: Profits are being taken at 198bp, resulting in a final P&L of +85bp (including carry).
• Model Insights: The model suggests that Brazil 5y CDS is still overbought by 39bp.
• Model Bands: The 95% non-parametric probability model bands are at 77bp and 246bp.
• Future Strategy: The team will wait for further macro policy signals from the new administration before re-entering the position.
• Overall P&L: The year-to-date P&L of the overall CDS strategy stands at USD2.3mn.

Strategy Overview

The strategy is based on the hypothesis that debt dynamics significantly influence Latin American credit risk, which is proxied by 5y CDS. The team developed an equation to approximate the theoretical level of 5y CDS using three variables:

1. Debt Dynamics Indicator (Domestic): The difference between the current level of real interest rates (forward-looking 2y) and the theoretical level that makes Δb stable.
2. US Real Interest Rates (External): External factor affecting credit risk.
3. Spread between BAA Rated US Corporates and UST Yield: Another external variable used to proxy credit risk.

The formula is:

CDS 5yt = y = θ + λ * debt dynamics indicator t + US real interest rates t + BAA Corp t

Key Information

• The model suggests there is potential for further compression of Brazil 5y CDS by ~35-40bp.
• The team is cautious about re-entering the position and will assess new cabinet and macro policy signals before doing so.
• The strategy involves a short position in Brazil 5y CDS, which has been profitable so far.
• The strategy is not a recommendation but a discussion of potential investment opportunities.

Legal and Regulatory Information

• This document is a marketing communication and not investment research.
• It is intended for Relevant Persons as defined under MiFID II and other jurisdictions.
• BNPP and its affiliates may have conflicts of interest due to their involvement in investment banking, underwriting, and advisory services.
• The document is not a prospectus and does not constitute an offer to buy or sell securities.
• Information is based on public sources and may not have been independently verified.
• BNPP disclaims any liability for the accuracy or completeness of the information or any use of it.
• The document is for internal use and may not be reproduced or distributed without prior consent.

United States Disclosures

• Options and ETFs discussed are complex and may involve significant risk.
• BNPP and its affiliates may have financial interests in the securities or ETFs discussed.
• Certain securities may not be registered under US Securities Laws and are considered "restricted securities".
• The document is a general solicitation of derivatives business and not an offer to sell securities in the US.

Regional Legal Notices

• UK: The document is communicated by BNPP London Branch, authorized by ECB, ACPR, and FCA.
• France: Produced and/or distributed by BNPP SA and BNPP Arbitrage, both authorized and supervised by ECB and ACPR.
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• Switzerland: Intended solely for "Qualified Investors" as defined by Swiss law.

Conclusion

The trade idea involves taking profits from a short Brazil 5y CDS position based on a new model. The team remains cautious and will monitor macroeconomic and policy signals before re-entering the position. The document is a marketing communication and not investment advice, with important legal disclaimers regarding liability, use, and distribution.