[skywalk]

Can we stop quoting the underlying notional size when comparing size to equity markets? If you know how a derivative works, it's well understood that quoting the notional to represent size just doesn't make sense.

To put it simpler, a terminated CDS contract does not mean there is a loss of wealth equal to its notional, whereas a stock price going to zero in the equities market literally means you just lost the complete amount you invested.

Not to sound offensive, but I've heard this comparison way to many times and it just doesn't add up in terms of prices - most swaps, for instance, have their fixed leg in the single digits in relation to their notional.

[nissimk]

That's certainly true for interest rate swaps, but credit default swaps are actually quite similar to stocks. For example when Lehman filed and the stock went to 0, the CDS settled at 91.375 [1] meaning that the protection seller had to send 91.375% of the notional value to the protection buyer. Yes, in most cases there is no credit event and even in many credit events the impairment to the debt is much less than 90%, but also most stocks don't go to 0. This case is a good example because the maximum market cap of Lehman stock was 60 bln [2], but the CDS market moved 270 bln in the credit event (see [1]).

[1] http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a...

[2] http://www.investopedia.com/articles/economics/09/lehman-bro...