January 29, 2009 4:57 PM
My comment 1: Two questions:
(i) How is counterparty risk different from credit risk? They both involve the risk that a counterparty fails to make payment on a liability.
(ii) Unfunded derivatives are nothing more than a promise to make payment in the future. What “cash” are you talking about?
My comment 2: Just a note for the blog administrator: The delay between the submission of comments and the posting of comments is irritating.
Subscribe to:
Post Comments (Atom)
Apparently the Atlantic Business Channel has a long delay in posting comments, since Derivative Dribble submitted his reply shortly after my post went up, but it didn't appear on the blog for at least 6 hours after that (I checked). Anyhow, since comments are so delayed at the The Atlantic, I thought I would go ahead and post my response to DD here. (These are approximate. I didn't actually copy the posts before hitting submit -- someday I'll learn!)
I'll keep updating this post if the dialog continues.
Derivative Dribble (DD) responded to my post with the following.
ACC,
As I've said a million times, CDSs, like all contracts, create counterparty risks and therefore can create substantial reliance costs. That is not at issue in this article.
Secondly, unfunded derivatives cannot be considered "allocations of capital" since they are, by definition unfunded. That cash is free to circulate through the capital markets.