CDS Delivery Option E-Book

David Boberski

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg Professional
• Sprache: Englisch

Seitenzahl: 276

Veröffentlichungsjahr: 2010

Beschreibung

For traders trying to navigate the increasingly volatile credit default swap market, CDS Delivery Option provides worked-out examples, over 30 charts, a case study of Delphi, and detailed explanations of how the subprime crisis caused the credit crisis and the near collapse of the GSEs. The book includes detailed information on: * how to value a CDS contract * how to value the delivery option * how contract value changes when the yield curve flattens or becomes steeper * how contract value changes with bullish or bearish market moves * how to figure out when to buy protection and when to sell protection * how to hedge CDS risk * when and how to unwind a contract prior to settlement * when to hold a trade through delivery * how to navigate a "squeeze" (when the notional value of contracts going through delivery is larger than the supply of the cheapest-to-deliver issue) * when buying contracts can make their prices go down * how to construct a basis trade * how to find arbitrage opportunities * how to analyze default probability and corporate debt * when to settle via auction and when to settle via physical delivery * which note is the cheapest to deliver This book is an indispensable resource for all market professionals working in the CDS market.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Table of Figures

Introduction

The Credit Crunch of 2007

Rapid Growth in the Credit Derivatives Market Explained

The Delivery Option

Physical Delivery Links Markets

Bridging the New York/Chicago Divide

PART I - Markets and Mechanisms

Chapter 1 - Interest Rate Policy, Housing Prices, and the Credit Crunch

An Unspoken Assumption

The Music Stops in Home Prices

The Music Stops in Lending

The Music Stops on Wall Street

Fed in a Box

Chapter 2 - The Crisis After Subprime

Agencies Born of Crisis

Contradictory Objectives?

The Golden Goose

Losing Focus

Chapter 3 - The Link Between Credit Derivatives and Bonds

Caulis Negris

The Music Stops for the Agencies

The End Game for the Government-Sponsored Enterprises

PART II - The Delivery Option

Chapter 4 - Delivery Option: The Link Between Futures and Credit Derivatives

Assumptions Behind the Credit Default Swap Basis

Default Probability, Corporate Debt, and the Delivery Option

A Review of Treasury Futures Mechanics

Pricing Treasury Futures Delivery Options

The Fair-Value Method for Pricing an Embedded Option

Chapter 5 - The Squeeze

Making Mischief

Distorted Economics

Chapter 6 - The Cheapest-to-Deliver Option in Credit Default Swaps

Quantifying the Value of the Delivery Option

A Proof by Contradiction

Applying the Fair-Value Analysis

More Lessons from the Futures Market

Chapter 7 - Delphi: A Real-World Example

Recent Developments: Destroying Value

PART III

Chapter 8 - Designing an Agency Credit Derivatives Futures Contract

Chapter 9 - Bringing the Index to an Exchange

PART IV - A Bear Market Case Study

Chapter 10 - The ABX Meltdown

INDEX

ABOUT THE AUTHOR

ABOUT BLOOMBERG

Table of Figures

Figure 1.1 Growth of the Corporate and Credit Derivatives Martket

Figure 1.1 Slope of the 2-Year and 10-Year Treasury Curve by Business Cycle

Figure 1.2 S&P Case-Schiller Home Price Index

Figure 3.1 Chinese Holdings of U.S. Treasury and Agency Notes

Figure 3.2 2-Year Treasury Note Yields Versus the ABX Index

Figure 4.1 CDX vs. Interest Rate Swap Spread

Figure 4.2 Empirical Perfomance of Treasury Bond Contracts Compared to Cheapest-to-Deliver issue

Figure 4.3 Long Bond Contract Perfomance Relative to Cheapest-to-Deliver Issue

Figure 4.4 Principal Components Decomposition of 2-, 5-, 10-Year Treasury Note Curve into Primary Drivers of Volatility

Figure 5.1 Deliveries at the CBOT vs. Issurance of Treasury Debt

Figure 5.2 Fails Data

Figure 6.1 Debt Distrubution for Fannie Mae

Figure 6.2 Performance of a 5-Year Note and a Delivery Option Basket with Thirty Years’ Worth of Maturities

Figure 6.3 Example of a Binomial Tree with Equal Jumps at Each Increment

Figure 6.4 Binomial Tree Built With Equal Probabilities

Figure 6.5 Contrasting Two Binomial Tree Constructions

Figure 6.6 Fannie Mae Debt Distribution With Yield Curve Overlaid

Figure 6.7 Price and Yield ot the CTD Note vs. Lowest Issue

Figure 6.8 Underperformance of the CTD Compared to the Shortest Note Eligible for Delivery

Figure 6.9 Replicated Options Basket and Resulting Error of Combined Portfolio

Figure 7.1 History of Delphi Note Prices

Figure 7.2 10-Year Treasury Note Prices Are Relatively Close to One Another

Figure 7.3 Delphi Note Prices End Up at the Same Place, but Begin with Prices That Are Points Apart from Each Other

Figure 7.4 Delphi Note Price/Yield Leading Up to the Default

Figure 7.5 Delphi 29 Note Compared to Delphi 06 Note

Figure 8.1 Agency Yields Campared to Treasuries and Interest Rate Swaps

Figure 8.2 Moody’s Disturbution of Recovery Rates for Straight Bond Issues, 1982-2001

Figure 8.3 FHLB Debt Volatility Compared to Fannie Mae and Freddie Mac

Figure 10.1 Unusual Times for the ABX Index

Also available from Bloomberg Press

The Credit Default Swap Basisby Moorad Choudhry

Fixed-Income Securities and Derivatives Handbook:Analysis and Valuationby Moorad Choudhry

Credit Derivative Strategies:New Thinking on Managing Risk and Returnby Rohan Douglas

Innovations in Investment Management:Cutting-Edge Research from the Exclusive JOIM Conference Seriesedited by H. Gifford Fong

Introduction to Option-Adjusted Spread Analysis:Revised and Expanded Third Edition of the OAS Classicby Tom Windasrevised by Tom Miller

Securitization Markets Handbook:Structures and Dynamics of Mortgage- and Asset-Backed Securitiesby Charles Austin Stone and Anne Zissu

A complete list of our titles is available at www.bloomberg.com/books

Attention Corporations

This book is available for bulk purchase at special discount. Special editions or chapter reprints can also be customized to specifications. For information, please e-mail Bloomberg Press, [email protected], Attention: Director of Special Markets, or phone [phone].

© 2009 by David Boberski. All rights reserved. Protected under the Berne Convention. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY 10022 or send an e-mail to [email protected].

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This publication contains the author’s opinions and is designed to provide accurate and authoritative information. It is sold with the understanding that the author, publisher, and Bloomberg L.P. are not engaged in rendering legal, accounting, investment-planning, or other professional advice. The reader should seek the services of a qualified professional for such advice; the author, publisher, and Bloomberg L.P. cannot be held responsible for any loss incurred as a result of specific investments or planning decisions made by the reader.

Library of Congress Cataloging-in-Publication Data

Boberski, David.

CDS delivery option: better pricing of credit default swaps / David Boberski.

p. cm.

Includes bibliographical references and index.

Summary: “David Boberski is executive director and head of exchange-traded derivative strategy within Prime Services at UBS Investment Bank. Institutional Investor has named Boberski to its All-American Fixed-Income Research Team for his work in federal agency debt and interest rate derivatives. This is Boberski’s second book”—Provided by publisher.

ISBN 978-1-57660-263-8 (alk. paper)

1. Credit derivatives. 2. Swaps (Finance) 3. Default (Finance) 4. Risk management. I. Title.

HG6024.A3B617 2009

332.63’2—dc22

2008041451

Will, there’s a reason for the world: you and I.

INTRODUCTION

The emperor has no clothes. Three of 2008’s more dismal events illustrate the point:

• More than twenty of the world’s largest banks and securities firms, most with carefully cultivated reputations for excellence in risk management, reported combined losses of $500 billion from investments in subprime mortgages and their derivatives (according to Bloomberg News).

• Bear Stearns, a firm that prided itself on its acumen with structured mortgage products, was bailed out by the Federal Reserve and merged with JPMorgan Chase after troubles that had begun a year earlier in two of its hedge funds. In just a few months’ time, funds that had produced years of steady gains saw their assets marked down to a few cents on the dollar.