User:Kondorcap/Sandbox

The Fishing consists to accumulate mispriced bonds on stock exchanges. The Trader sends bid prices of bonds on the financial markets and he waits that the investors (usually private small investors) sell their bonds below their fair values. Therefore the trader is like a fisherman who waits on the side of the river that the fishes swallow the bait. Unlike equity or FX markets, on bond markets - specially European Structured Bond Markets - it's possible to calculate a fair value for each bond and to lock this value using interest rate and credit default swap derivatives.

For example, if the Fair Value (FV) of Bond A is 100%, the Trader will send on market a Bid Price of 99% and (maybe) and indicative Ask Price at 101%. Automatic trading systems allow him to remain best bid until a prefixed best bid price, usually FV minus a spread (his potential minimum earning), in this case we assume 50 ticks (0.50%). The machine increases automatically the bid until 99.50% to remain best bid on market. Of course the FV changes while markets move (rates, fx, inflation etc) and the computer pricing systems have to calculate in real time the fair values and have to modify prices on market. When an investor or a counterpart hits the bid, the Trader buys the Bond A and his potential earning will be the difference between the FV and the purchased price. If he does a good hedge of risks, he will lock the gain, otherwise he will risk to lose what he thought to have gained.

In the end of day, he will accumulate millions split in several bonds and he will have to hedge accurately all embedded financial risks in order to lock the expected earning calculated by the pricing system. The fishing is this activity: to accumulate mispriced bonds and sell them again in market at fair value or in asset swap package.

--Kondorcap (talk) 16:53, 3 January 2012 (UTC)