We are always on the look-out for low-cost long-vol trades with lots
of convexity (large upside, low downside). We think we've found the
'ultimate' black-swan trade. Warren Buffett's Berkshire Hathaway bought
Burlington Northern and implicitly assumed its debt which caused the company's
CDS to collapse (risk to plunge dramatically as one would expect) to extremely
low levels of insurance cost of only 15bps (or only $15,000 per year to protect
$10,000,000 of debt - while gaining or losing ~$5,000 per bps shift in BNI's
risk). However, as risk has picked up in the last week or so, BNI's CDS
has risen by 7bps (just under 50%) to 22bps and looks set to go even
wider if Buffett's Big Bullish 'Bernanke' Bet doesn't pay off. Buying BNI
protection at 22bps seems like the ultimate cheap expression of the
"All aboard the 'I wrote billions of naked puts just before 2008 market
crash' train" trade.
Of course this is a very cheap play on a systemic problem in US (and global) equity markets which would implicitly hurt Berkshire Hathaway but we do note that BNI has plenty of debt outstanding (so short-term deliverables are there)...
(h/t Alex Gloy)
Of course this is a very cheap play on a systemic problem in US (and global) equity markets which would implicitly hurt Berkshire Hathaway but we do note that BNI has plenty of debt outstanding (so short-term deliverables are there)...
(h/t Alex Gloy)
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