I'm not sure what will happen to the Euro. What options do I have to assure that my capital will not be diminished, in the event something bad does happen to the Euro?

Are credit default swaps (CDS) something I could use to protect myself against decline of the Euro? If not, what else could I consider?

  • @ChrisW.Rea I read the FAQ, I'm looking rather for a strategy, I read about CDS and wondered whether they could save my savings in case somthing unexpected would happen to the EUR. Could you please help me to rephrase my question? – bold Dec 18 '11 at 19:30
  • OK. I've tried to rephrase to avoid the "should I buy..." format. – Chris W. Rea Dec 18 '11 at 21:44
  • Sure, if you happen to have about $10 million and access to a swaps dealer. CDS are for very large players only. In terms of what else you could do, you could sell your euros. – Tal Fishman Dec 19 '11 at 1:37
  • A big NO. CDS are out of the purveiw of regulatory authorities. If the counterparty goes bust, no respite ? AIG is a prime example. Take out a futures contract, safe and the exchange will save your behind, if the other party goes bust. But that is hedging, no gains and at the same time no loses also. – DumbCoder Dec 19 '11 at 12:01

Credit default swaps are financial instruments used to express bearish attitudes on a particular credit vehicle, such as a bond issued by a corporation or country. You're essentially purchasing an insurance policy over-the-counter from another party who promises to pay out if the entity who received the credit fails to comply with its repayment terms. CDS prices in general move in the opposite direction of bond prices; if the market believes that a bond is likely to be defaulted upon, then its desirability will diminish, lowering its price. At the same time, the increased risk of default means that those who sell CDS will demand a higher premium up front to insure the debt. This makes CDS a potential vehicle for betting on a decline in bond prices.

There are a couple issues that make CDS unlikely to suit your situation:

  • CDS are only available to institutions with a lot of capital. They are not available to retail investors. In addition, they are traded over-the-counter and thus are not subject to many securities regulations.

  • If you're in the EU, trading of so-called "naked" CDS was banned, effective December 1, 2011. This means that you can only legally purchase CDS to insure debt that you own; you may not purchase CDS as a means to speculate on the decrease in value of credit that you do not own. Therefore, use of CDS as a mechanism to short-sell bonds is prohibited.

If you believe that the Euro will decrease in value in the future, then you can more directly express that using foreign-exchange trading; you could sell your Euros and buy another currency that you think will gain strength in comparison. If you believe that Euro stress will negatively affect the equity markets, you could look into taking a short position on European equities. As always, though, thoroughly research before you invest in anything; do not put your money in something that you don't understand clearly.

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