Class 7 -Fixed Income Workshop II- CDS Market
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Transcript of Class 7 -Fixed Income Workshop II- CDS Market
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8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market
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Credit Default Swap (CDS)
A credit default swap is a bilateral financial contract in which onecounterparty (the credit protection party) makes periodic payments toanother party in return for a promise of payment contingent on some agreedupon third party reference credit(s) defaulting in respect of some statedobservable credit event.
Default is the non-performance of an agreed obligation.
For example, the non-payment of interest or principal under a swapagreement by one of the parties to the swap would be regarded as default.
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Credit Ratings
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Anyone wants to have insurance in Bond Holdings?Credit Default Swaps
CDS is a bilateral contract that provides the buyer of the CDS insurance against the risk of default by a particular company.M arket for products in 2004
C r e d i t D e f a u ltS w a p s
9%
M a n a g e d
S ynthe t i c C D Os2 %
S ynthe t i c Ba lanceS hee t C LOs
8% C LNs
3%
Portfol io De faul tS w a p s
6%
To tal ReturnS w a p s
1%
Options
1%
M a n a g e d S y nt he t i c C D Os
S yn th e t ic Ba l a n c e S h e e tC LOsOptions
C LNs
Por t fo l io D efau l t Swap s
To tal Re turn S wa ps
C r e d i t D e f a u lt S wa p s
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Who were the end users of CDS?
Asset Managers5%
Hedge Funds8%
Banks(Securitisation)
8%
Special
PurposeVehicles
5%
Reinsurance14%
Insurance9%
Banks47%
Corporates4%
InsuranceReinsurance
Special Purpose VehiclesBanks (Securitisation)Hedge Funds
Asset ManagersCorporatesBanks
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Credit Default Swap spread (the premium)
T he Credit Default Spread is quoted in asis oints per annum.P aid Quarterly in arrears
1 yr
Trade
date
Buyer of CDS paysquarterly
Seller of CDS protectionreceives quarterly payments
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Credit Default Swap spread (the premium)
F or example, a CDS on F ord M otor Credit is quoted at 0 bps per annum on anotional 0 million USD. T he protection buyer ill pay -
? A USD22.222,20360910080.0000,000,10 !vv
N otional amount x ( asis P oints x days / Day ase)= Quarterly payment
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Credit default Swaps- Credit Events.
F or a Credit Default S ap payment to be made, a credit event on a reference entitysasset has to have happened. P ayment is contingent on the credit event.
W hat is a credit event ?
- ankruptcy- F ailure to pay
- estructuring
- epayment Acceleration on Default (cross default clauses)
- epudiation
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Short-tour of the Fixed Income Information in 3000Xtra
What data in Reuters 3000 Xtra is relevant to CDS?
CDSINDEX
GFIINDEX
HSBC/CDS
TRACX (Morgan Stanley)
General
BONDS (F3)
Latest ratings with history and news to analyse credit risk , f or example RRS 0001 shows the ratings historyf rom fu ll range o f ratings agencies; AAA shows credit news alerts
(US composite. has all of the composite pages) ( ff the runs)
(Interest rate S W AP s)
< CU RV ES> ( F3 )
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Customize your CDS Screen(CDS Data, Yield Curve, News)
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Pricing Credit Default Swaps.
T here are t o approaches
V aluation by proxy.
M athematical approach.
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Search Credit Default Swap Model from Getgoing
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Credit Default Swap Model Hutchison CDS Price
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Search CDS from Equity Reference Name
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Search CDS from Equity Reference Name
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Search CDS from Bond ID
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Search CDS Prices from Major Contributors
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Hutchison Credit Curve
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Correlation : CDS & Share Prices ?
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h ttp://s h owcase.session.rservices.com
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Credit Default Swap
Use the Credit Default S ap model to locate a reference credit and analyse the spread history of thecredit. You can compare a reference credit to other reference credits in a peer group. You can alsocompare a reference credit to the underlying stock, or to a bond asset s ap spread. T he Credit DefaultS ap model presents the information ith the best company and credit default s ap (CDS) ne s in onedisplay .
FeaturesView intra-day updates of bid, offer, and dealt CDS spreads from GFI
View the GFI history of a CDS bid and ask spread
View intra-day updates of bid and offer CDS spreads from other contributors, such as HSBL and Credit Trade
View credit reference spreads for over 1,800 entities held in the Reuters database from a number of contributors,including GFI*
Compare the performance of a CDS spread to the equity price over time in a graph
Compare a CDS spread against two others CDS spreads over time in a rebase graph
Compare the history of the CDS spread against the asset swap spread of the selected bond
Identify news stories linked to historic events in the history of a CDS and related equity
Find a specific reference entity from a bond or equity, or from a sector or regionView all the related issues of a reference credit
View all the details of the reference credit
View the best company and CDS news in one display
View the price and volatility information on the underlying stock
View asset swap and benchmark spreads for related bonds
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CDS Analysis Model
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CDS Analysis
CDS Analysis model allo s you to price a credit default s ap (CDS), and value an existing CDS.
Features
CDS Analysis model calculates:
CDS spread and premium
a default probability curve from the CDS spreads
a CDS spread curve from the contributed spreads using credit risk models
asset s ap spreads from the bonds closest to the CDS maturity
DV 01 for the CDS spread and the risk free zero curve
valuation of existing CDS
You can:
compare CDS spreads against asset s ap spreads
price using the Cox, Ingersoll, and R oss model or a credit event probability curve
calibrate the credit risk models from CDS spreads or a risky curvedefine a risky curve from interest rate s ap prices or related straight bonds
use your o n zero curve for the risk free curve
vie the data in a chart
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Issuer Model
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Features and benefits
Using the Issuer orksheet you can:Display information on a selected issuer of stocks and/or bonds.V ie information on the sector in hich the company is active.V ie a summary of the latest company report.V ie stock/bond listings and Issuer level ratings
M ove to a related orksheet giving further information on a selected stock or bond.T he Issuer orksheet provides information about an issuer of stocks and/or bonds,including the sector in hich the company is active, selected facts from the latestcompany report, company ne s, listings ith all issued stocks and bonds, and issuer-level rating, here available.
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Bond Credit Model
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Features and benefits
T he ond Credit orksheet provides the full picture on the credit risk of a bond or anissuer through the integrated display of relevant ne s, real-time and additional researchdata. Credit information as ell as actions and assignment notices from specific ratingagencies is available at the issue and issuer levels. T he orksheet also gives anovervie of an issuer's credit history.
With this worksheet you can :O btain an overvie of credit ne s and current and historic rating information on anissuer and issue level.V ie all live bonds from the same issuer.O btain rating actions and credit assignment notices from specific rating agencies suchas S& P Credit ire.O btain credit spreads contributed by J P M organ.
The Bond Credit worksheet gives you :T he full picture on the credit risk of a bond or an issuer through the integrated display of relevant ne s, real time, historic and additional research data.
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Power Plus Pro - FI
Building Fixed Income spreadsheet and data downloading (Adfin Functions)
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Q & A