Saturday 2010-12-04

Were I working at one of China's sovereign wealth funds, I'd recommend:

  1. Sell credit default swaps on Portugal sovereign debt
  2. Buy Portugal sovereign debt
  3. Tell the Portugal gov't that if they default, you want all their shareholdings in Macau and Angola
  4. If they don't agree, threaten to nationalize their holdings on "security grounds"; they'll agree
  5. Tell the world you just bailed out Portugal
Only do as much of each of market operations as your probability estimates suggest. You make money if the market for PT bonds goes up, and you make money if PT defaults.