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But monetary policy is losing its efficacy and prudent investors need to position for a likely turn in the credit cycle and rise in default rates. This is where CDS single names come into their own - there is no better instrument for hedging idiosyncratic risk.
How much of corporate-treasury yield spread is due to credit risk? As one source points out:. Contained within this cookie are the terms that were agreed to — either personal investor or professional investor. Cao, C. Forwards Options. Conclusion The CDS market has, rightly or wrongly, been fingered as a prime culprit in the subprime crisis.
They are also ideally suited for hedging counterparty credit risk. Perhaps it is not widely understood, but bank CVA desks constitute a large portion of demand for single name CDS and have done for some time. The use of CDS in this process is enshrined in Basel CVA regulations and all major regulators mandate its use as a measure of default probabilities.
As well as hedging, investors use CDS to implement strategies that are technically difficult in the cash market. Theoretically this can be done in the bond market but often investors will encounter liquidity hurdles that cannot be overcome except by using a synthetic instrument such as CDS. There are some CDS index constituents that have only one or two bonds outstanding, making the practical implementation of relative value plays through cash unamenable.
So, the hedging capacity and applicability for certain trading strategies, combined with the volatile macroeconomic picture, has created conditions that stabilised single name activity.
These factors also apply to CDS indices. And yet one may ask why volumes have risen faster in indices than single names? The factors highlighted for single names are all pertinent to indices.
In analyzing the aggregate profits of these basis trading strategies, the interest rate level and slope, aggregate bond market index yield spreads, and a broad. CDS Basket Trades (or Correlation Trades): Credit protection can be sold on an entire portfolio of bonds; the seller pays only for the individual issue that defaulted and the basket continues. First to Default Baskets: seller will deliver the entire notional amount of the basket once the first default takes place.
But the latter attract a far broader range of investors, who find their macro-hedging suitability and strong liquidity appealing. Workshop 1: Pizza Express restaurant company — Calculating NPV of credit default swap and testing its sensitivity to credit curve shape and recovery rate.
Extracting survival probability curve.
Workshop 2: Building and interpreting a market risk report for a CDS portfolio. Workshop 4: Pricing FTD and NTD baskets on portfolio of sovereigns, banks and corporates; calculating Greeks; setting up the hedges at inception; dynamic hedging for a given path of spread changes. I liked the course a lot. The tutor is a real expert in his field. Highly recommended if you want to get into the details of CDS.
I highly appreciated the breadth and strength of the course content and the personalised approach of Rupesh [teacher]. Great learning experience and tangible practical application for my job. Convertible Bonds: Issuing, Pricing and Investing.
Equity Derivatives 2: Exotics and Structures. Inflation Derivatives and Index-Linked Bonds.
Interest Rate Derivatives 3: Structuring. LONDON, May 20 IFR - Credit investors are returning to the kind of leveraged trading strategies not seen since the heyday of the structured credit bubble, as central bank financial repression is fostering an increasingly desperate reach for yield. Trading in credit index tranches is working up a head of steam, dealers say, as credit funds faced with a dwindling range of options to boost returns have resorted to selling first-loss protection on benchmark credit default swap indices in Europe and in the US.
Tranched structures flourished in the run-up to the crisis, as low yields and depressed volatility diminished the returns to be had by more conventional methods of going long credit. Selling protection against the first or second wave of defaults in a portfolio of credits gave investors access to leveraged, higher-yielding investments. Dealers piled into this correlation business, selling bespoke structures such as synthetic collateralised debt obligations to clients ranging from insurance companies to bank treasuries.
This in turn, fuelled activity in the more standardised index tranche market, which was used to hedge these vast structured credit books. The tranched version of the iTraxx Main Series 9 index, which was launched in the first half of , still has a whopping USD78bn net notional outstanding according to the DTCC - far more than any other credit default swap index in existence.