Credit Derivatives - College of Business Academic Server信用衍生性金融商品业务服务器学院学术.pptVIP

Credit Derivatives 2003 – Notional value $2.31 trillion Investment grade bonds - $3.1 trillion Purposes Transfer and repackaging of credit risk Default baskets and synthetic loss tranches New exposure to credit risk to leverage credit risk Credit Derivatives Market $2.306 trillion notional value in 2003 was a 50% increase from 2002 Credit default swaps - 73% Correlation products – Synthetic loss tranches and default baskets – 22% U.S companies – 43.8% European – 40.1% U.S. has a much larger cash market Banks – 50% Hedging and diversification Insurance companies – 14% Hedge funds – 13% Credit Default Swaps Bilateral contract to transfer credit risk of a reference entity from one party (protection buyer) to another party (protection seller) Protection buyer – shorting credit risk Protection buyer makes regular payments (usually quarterly) know as the premium leg until credit event or maturity Default swap mechanics If a default occurs, there is a cash settlement or physical settlement Pari Passu From Wikipedia, the free encyclopedia pari passu is a Latin phrase that means at the same pace, and by extension also fairly, without partiality. In finance this term refers to two or more loans, bonds or series of preferred stock having equal rights of payment, i.e., have the same level of seniority. In asset management firms, the term denotes an equal allotment of trades to strategically identical funds or managed accounts. This term is also often used in bankruptcy proceedings where creditors are said to be paid pari passu, or each creditor is paid pro rata in accordance with the amount of his claim. Here its meaning is equally and without preference. Physical settlement – most common Requires protection buyer deliver notional amount to the seller for notional amount paid in cash. Generally, the deliverable instrument is a basket with restrictions on maturity and pari passu. The buyer is long a “cheapest-to-deliver” option. Cash settlement – not generally used in CDS,