hedging Cyprus investments

[nym]

Let's say that I am long in an in liquid company that generate most of his return in Cyprus that (hopefully) will generate some alpha. We are talking about a small amount, let's say 0.5M. How would you hedge this position against the "risk of the country" ?

I was thinking about shorting some ETFs but i have not find any that are 100% exposed to Cyprus. Any better idea?

[tbretagn]

Maybe if you defined what you thought was the risk of the country?

Default? Moving away from Euro? Capital control?

[Cheng]

Sovereign CDS would protect you against default, transfer restrictions iirc and once the new docs are in place against "voluntary" hair cuts and the like.



The issue is that these are OTC derivatives and 0.5M EUR is way to small. If you have collateral agreements and the like in place you should be able to buy protection on 5M, though.

[Cheng]

Just had a quick look re pricing... these things don't trade at discount prices Smiley .

[nym]

I agree 0.5M is too small for a CDS.

My main reason for the hedge is that the current situation with Russia may slow down the economy in Cyprus.

[Cheng]

Just to put things in perspective: 5y Russia is trading significantly tighter than 5y Cyprus. Seems like you have some more things in the price than just Russian risk.

[AndyM]

Let the margin of safety be your hedge. If there isn't a chunky margin of safety, there's surely no reason to invest in Cyprus.

[svisstack]

Important question to ask I think is from company have income streams.

[Cheng]

@AndyM: Which brings us to the more general question: why take Cyprus risk if you get less risk with a smaller but sufficient margin of safety (hat tip to Graham, Dodd) elsewhere...

[AndyM]

Blame The Bernank!