Download Credit Derivatives by Gunter Meissner PDF

By Gunter Meissner

The marketplace for credits derivatives--financial tools designed to move credits chance from one get together to another--has grown exponentially lately, with quantity anticipated to arrive greater than $4.8 trillion through 2004. With call for expanding from the personal area for finance execs educated within the possibilities - and hazards - inherent during this fast-changing marketplace, finance classes are already arising to satisfy this want.

Credit Derivatives is the 1st student-oriented textual content to give an explanation for this box to company scholars with a historical past in finance. Real-world examples are pointed out all through, strengthened through end-of-chapter questions, and scholars can benefit from hyperlinks to pricing types on the net. This concise e-book is perfect for teachers looking to complement conventional derivatives direction fabric, in addition to these seeking to increase their very own figuring out of this fast-growing region.

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The difference between a TROR and an asset swap In an asset swap, one party pays a fixed rate, which originates from an asset, thus the coupon in the case of a bond. The other party pays a floating rate, usually Libor plus a spread. This spread is referred to as the asset swap spread. It is typically assumed that the Libor curve and swap curve are risk-free curves. It follows that the asset swap spread is equal to or greater than zero, since the probability of default of a corporate is equal to or greater than zero.

Leveraged Default Swap: In a leveraged or geared default swap the payoff is a multiple of the loss amount. The payoff is usually determined as the payoff of a standard default swap plus a certain percentage of the notional amount. The motivation for the leveraged default swap buyer is speculation but often also administrative simplicity. Rather than hedging default risk on different assets individually, a single leveraged default swap can hedge a large notional amount. However, if the underlying asset in the leveraged default swap does not match the true expo- Credit Derivatives Products 25 sure of the portfolio, the default swap buyer is exposed to basis risk: Certain assets in the portfolio might default, which are not protected in the leveraged single asset default swap.

In this case the credit-spread S will decrease. 9) from the seller of the credit-spread contract. The seller of the credit-spread 36 Credit Derivatives Products contract has a short bond position. He hopes the relative bond price will decrease. In this case, the spread S will increase. 9). Let’s look at a simple example. 6: An investor believes the credit quality of a bond will decrease and hence the relative price of the bond will decrease. He sells a credit-spread forward contract with an agreed spread K of 2%.

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