國
國立台灣
N
借屍 Zombi
Arbitr
指 Advis
灣大學管 碩
Depart College
National T Ma
屍還魂 ie Trade rage Fro
Ky
指導教授 sor: Shy
中華民 Ju
1
管理學院 碩士論文
tment of F e of Mana
Taiwan U aster The
: 基差 e: The R om Beyo
貝永和 yle Belz
授：李賢 yan-Yua
民國 95 年 uly, 200
院財務金 文
Finance agement
Universit esis
差交易重 Return o
ond the
和 zer
賢源 博士 an Lee, P
年 6 月 09
金融學系
ty
重現 f Basis
Grave
士 Ph.D.
系
Zom
The Ret
Kyle Be Departm
College o
Abstract The basis a for investm trade and a practices in long-term r affects the sustainabil
借屍
貝永和 國立台
摘要
基差交易策 今市場條件 信用貿易上 期獲利。另 差交易的長
mbie T
turn of B
elzer ment of F
of Manage
t
arbitrage tra ment banks a
adapted it to n fixed inco returns on t relationship lity of the ne
屍還魂
和
台灣大學
策略在 200 件，新的交 上，做出精 另外論述持 長期持續性
Trad
Basis Ar
Finance
ement, Na
ading strateg and hedge f o current ma ome credit tr the new bas
p between d ew basis tra
: 基
學管理學
8 年完全崩 交易概念和策 精確的分析 持有基差如何 性做出討論
de:
rbitrage
ational Tai
gy collapsed funds. New arket condit
rading, incl is trade.
debtor and c ade.
基差交
學院財務
崩潰瓦解，造 策略已經復
：包括什麼 何影響到債
。
2
from Be
iwan Univ
d at the end w trading m tions. This p luding what
Special atte creditor. F
交易重
務金融學
造成投資銀 復甦。本論文 麼因素會影響 債務人和債權
eyond th
versity
d of 2008, ca mentalities a
paper presen t factors affe ention is pa Finally, I co
重現
學系
銀行和避險基 文將針對新 響逐日計算 權人之間的
e Grave
ausing billio and practice
nts a rigorou ect mark-to- aid to the wa mment on t
基金數十億 新的交易概念 算損益評估及 的關係。最後
ons of dolla es have reviv
us analysis -market val ay holding b the long-term
億元的損失 念如何影響 及在基本貿 後，我也會
ars in losses ved this
of new luation and basis
m
。因應現 響固定收入 貿易上的長 會針對新基 s
Table of Introduct Section 1 Fund The Section 2 Section 3 Sens Sens Sens Sens Sens Section 4 Mar Mar Mar Section 5 Section 6 Scen Scen Conclusio Referenc
Contents tion
1: Basis Ar damentals o collapse of 2: The New 3: Sensitiv
sitivity to C sitivity to ch sitivity to p sitivity of th sitivity of th 4: Mark-to
rk to market rk-to-marke rk to market 5: Basis pa 6: How CD
nario 1: The nario 2: Pre
on es:
s
rbitrage B of the Trade f basis arbitr w Basis vity Analys Changes in th hanges in co arallel shift he basis to c he basis pac o-Market C
t sensitivity t sensitivity t sensitivity ackage usi DS Chang e hedged loa
datory beha
Before Sep e
rage
sis
he Dirty Pri oupon size ts in CDS cu changes in t ckage to rec Changes in y to parallel
y to changes y to changes
ing forwar e the Rule an
avior by bas
3
ptember, 2
ice
urve
the Slope of covery rate a n the Valu shifts in CD s in the stee s in the reco
rd CDS es of the G
sis holders 008
f the CDS c assumptions ue of a Bas DS curve:
pness of the very rate:
Game
curve s:
sis Packag
e CDS curv ge
ve:
5 6 6 8 10 12 15 16 17 19 21 23 24 26 26 28 31 32 33 37 40
Index of
F.1 The str F.2 The BR F.3 The ba F.4 Sensiti F.5 Sensiti F.6 Paralle F.7 Implied F.8 The eff F.9 Changi F.10 The e F.11 The e F.12 The e F.13 The e F.14 Mark F.15 Mark F.16 Mark F.17 Chang F.18 BRD F.19 The b F.20 The B
Figures
ructure of a RD for Cab asis package
ivity of the b ivity of the b el shifts in C d survival p ffect of a par ing the slop effects of ch effects of ch effect of rec effect of rec -to-market -to-market -to-market ges in the C
for CWLN basis packag BRD for CW
traditional le & Wirele e for Cable &
basis packa basis packa CWLN CDS probability w
rallel shifts pe of the CD hanging slop hanging slop overy rate a overy rate a sensitivity t sensitivity t sensitivity t CDS premiu with forwa ge for Cable WLN on Ma
basis trade, ess 8⅝, 201
& Wireless age to chang age to chang
S curve with a paral
in the CDS DS Curve
pes on impli pes on the b assumptions assumptions to parallel s to changes i to changes i um for forwa
ard CDS e & Wireles ay 22, 2009
4
, showing p 9
8⅝, 2019 ges in the bo ges in the co
llel shift in C S curve on th
ied survival basis packag s on implied s on the bas shifts in the in the slope in the recov ard CDS co
ss 8⅝ on Ma
ayments be
ond price oupon size
CWLN CD he basis pac
l probabiliti ge
d default pro sis package
CDS curve of the CDS very rate ontracts
ay 22, 2009
fore and in
S curve ckage
ies
obability
e S curve
9
the event oof default 8 13 13 15 16 17 18 18 19 20 20 22 23 25 26 27 29 30 37 37
Introductio In 1997 a t default swa hedge their more than corporate b
CDS quick tool for inv between th to take adv differences few basis p However, i dissolved i basis trade a large shif
This paper affect retur Special att debtor. F
1 Wikipedia,
2 Paterson, S
on
team workin ap (CDS).”
r loan portfo simple hedg bond marke
kly outgrew vestors to bo he credit ma vantage of d s between th points, thus
in the last q into hundred
and wideni ft in mental
r will provid rns on a bas ention will Finally, I ma
“Credit Defau S. WSJ, Feb. 9
ng for J.P. M
1 For the fi folios. As
ging. The et without ha
w their origin oth gain exp arket and oth differences b he cash bon
traders reli quarter of 20
ds of millio ing discrepa ity and prac
de a rigorou sis package?
also be paid ake some co
lt Swaps,” see 9, 2009.
Morgan Cha rst time com the popular e structure o aving to pay
nal purpose posure to th her capital m between the nd market
ed on timin 008 as liqui ons of dollar ancies betw ctice of the
us analysis o
? What fa d to how the omments on
e references fo 5
ase invented mmercial ba rity of the C of the CDS a
y out large f
of simply h he credit ma
markets. T e CDS mark
and the CD ng and lever
dity in the c rs in losses f ween the bon basis trade,
of the basis actors affect e basis chan n the sustain
or full citation.
d a new kin anks could n CDS increas
allowed inv face values
hedging cred arket and to
The basis tr ket and cash DS market h rage in order
capital mark for those in nd markets a
but have no
trade, as it i the mark-to nges the rela nability of th
.
d of derivat now use ma ed, it quickl vestors to ga
upfront.
dit risk, and take advant ade was one h bond mark have been sm
r to profit fr kets dried up nvolved2.
and the CD ot eliminate
is practiced o-market va ationship be he new basi
tive, the “cr arket instrum
ly became u ain exposure
d become an tage of diffe e of the firs ket. Historic mall, genera from the bas p the basis t The collap S market ha ed it.
d now. Wh alue of a ba etween cred
is trade.
redit ments to used for e to the
n important erences
t strategies cally the ally only a sis.
trade pse of the
ave caused
hat factors sis package ditor and
e?
The organi was practic how it’s cu a mark-to-m 6 I show ho conclude w
Section 1
Anywhere two marke difference
Fundamen
The idea b CDS prote credit qual instances in the trade at convergenc
The trick in instrument bond upfro
ization of th ced before S urrently prac market valu ow the basi with a few c
1: Basis A
the same un ts, when the is called “th
ntals of the
ehind the ba ction with t lity of the bo
n which the t a point wh ce.
n basis trad ts, in that th ont. In ord
his paper is September 2
cticed; in se uation analy is is changin comments o
Arbitrage
nderlying a e two marke he basis.”
e Trade
asis trade is the same bo ond will be e credit spre hen the two
ding is to cre here is no up der to make
as follows:
2008; in sec ection 3, a s ysis; in secti ng the relati n the sustai
Before Se
asset is trade ets are the c
s to hold a n ond as the re hedged by ead on the b markets are
eate two ide pfront paym the bond m
6
In section 1 ction 2 I exp sensitivity a
ion 5 I exam ionship betw nability of n
eptember
ed in two m cash bond m
neutral posit eference ent the CDS.
bond diverge e divergent,
entical asset ment, while c more like a C
1, I give a b plain how th analysis of mine the bas ween credito
new basis a
r, 2008
markets there market and c
tion by buyi tity. This The key to es away fro , the trader c
ts, in differe corporate bo CDS it is ne
brief explana he basis trad the new ba sis using for or and debto arbitrage tra
e exists a di credit defau
ing a corpor way any dra o a successfu m the CDS can expect t
ent markets.
onds require ecessary to g
ation of the de has chan asis trade; in
rward CDS;
or. Finally ding strateg
fference bet ult swap mar
rate bond an astic change ul trade is to spread. By to profit fro
. CDS are e the dirty p go the fundi
basis as it nged and
n section 4
; in section y, I
gy.
tween the rket this
nd buying es in the o find
entering om their
e unfunded price of the
ing (repo)
market to b funding co using a par and receivi
Basis = CD
Negative b bond, are r negative ba and buy pr (F) on the b expectation the CDS co negative ba speed and
Figure 1. Th
barrow the p ost, it is usef
r asset swap ing the cred
DS Spread –
basis trades, relatively ea asis trades t rotection on bond to fall ns prove tru ontract will asis is gener leverage to
he structure o
par value of ful to swap p. After ne dit spread on
– Bond Cred
where the asy to imple
the trader ne n the bond in l, or the CD ue, either the
rise. Bec rally small make signi
of a tradition
f the corpor the bond fo etting the pa n the bond (
dit Spread P
CDS spread ement and in eed only bu n the CDS m DS spread to
e value of th ause of the a few basis ificant profi
nal basis trad 7
rate bond.
or a fixed cr ayments, the (see also fig
Premium
d (D) paid i nvolve a po uy the bond market. Th
rise such th he bond (alr relative eas points at m its in the bas
de, showing p
Because w edit premiu e trader is le gure 1 bellow
s smaller th ositive carry (funding th he trader ex he basis con ready purch se in which most) and tem
sis trade.
payments be
we now have um over the eft paying a w):
han the cred y on the trad his purchase xpects either
nverges to z hased) will r negative tra mporary. Tr
efore and in t
e to pay a flo banks fund a fixed CDS
it spread (F de. To imple e in the repo r the credit zero. If the
rise, or the v ades can be rader’s mus
the event of d
oating ding costs S premium
F) on the ement o market)
premium e trader’s value of
implement st rely on
default
t,
Sour
The collap
The nation freeze in th in capital m second hal collapse of
At first gla relatively f wrong. W entity, mas participant under the m
3 Paterson, S
rce: Lehman Bo
pse of basis
nalization of he CP mark markets. L lf of 2008, p f the basis a
ance it may free from ch While basis
ssive structu ts, helped ca market cond
S. WSJ, Feb.
orthers
s arbitrage
f Fannie Ma ket and illiqu Losses at De primarily fro arbitrage tra
appear that hanges in th arbitrage do ural shifts in ause the bas ditions at th
9, 2009.
ae and Fredd uidity in the eutsche Ban om losses o ade.
, given the n he credit bon oes have a n n the bond m sis trade to u
e end of 20
8
die Mac, th e corporate b nk’s credit t on basis arbi
neutral posi nd market.
neutral posi market, as w
unravel. A 08 will clar
e collapse o bond marke trading desk itrage trades
ition of basi However, tion on the well as the e A review of rify the situa
of Lehman B et shattered k topped US s, becoming
is arbitrage , your first g
credit quali elimination f the structur
ation.
Brothers, th the establis S$1.8bn3 in g a symbol o
it should re glance woul ity of the re
of many ma re of the bas
he complete shed norms n the
of the
emain ld be ference arket
sis trade
First lets ex funding co Funding co significant positive ca to continue Lehman (a traders to c Even trade increasing ratio 30-50 capital just which did bond mark
As hedge f and the bot precipitous swap, payi credit prem implied cre exponentia market val
4 Shah, A,
5 McAdie, R
6 Shah, A,
xamine the osts even at osts of 40bp
perceived r arry on nega e. Then Le and later Wa close their p ers who had enormously 0x) as collat
t to maintain not have ab ket entirely
funds and ot ttom fell ou sly regardle ing par at in mium is imp edit risk of t ally. Trade ue of their t et al. 2008
R. 2008
et al. 2008
funding leg AA rated b p+ above LI
risks were t ative basis tr
ehman Brot aMu, the Ice position or m locked in R y. Instead teral, 10-25%
n the trades bility to mov
6.
ther players ut of the mar ess of credit nception and plied from th the bond is ers who had trades drop
.
.
g of the basi anks contin IBOR were topping LIB rades, the g thers collap elandic Ban move their b Repo rates f d of having t
% was dem s. This affe
ve bonds on
s were force rket. With quality. Re d receiving he dirty pric
increasing, d locked in l at phenome
9
is trade.
nued to rise common ev BOR+100bp growing size sed. Repo nks and othe bonds onto for longer pe
to place 2-3 manded, forc fect was mo nto the bank
ed to dump hout deman eviewing the
a fixed cred ce of the bo
thus (F) th lower credit enal rates.
Following t above LIBO ven for the b ps4. While
e of the neg o dealers, re
ers) simply the bank bo eriods of tim 3% of the pa cing banks t
st severe on k book and f
their bonds d to suppor e bond leg, dit premium ond, as the d e credit pre t premiums
the collapse OR through
best banks, e this would ative basis a eeling from
ceased to ro ook at the ba me found th ar value loan
o use enorm n hedge fund forced many
into the ma rt it, the pric
the trader h m above LIB dirty price o mium abov suddenly s
e of Bear St hout the sum
and those w d normally o
allowed the their own lo oll over loan anks fundin heir margins ned aside (a mous amoun ds and othe y players ou
arket, liquid ce of bonds has entered a BOR. How of the bond f ve LIBOR ri saw the mar
terns, mmer.
with offset the ese trades osses to ns, forcing ng rate5.
s
a leverage nts of er players
ut of the
dity ceased fell a par asset wever, the
falls the ises rk-to-
The real da corporate b amount.
credit qual relatively u in the risin bond mark began ama capital mar millions (a upfront” tr of basis arb
Section 2
The liquidi helped cau markets als mentality a
Under norm risk of defa 2008, bond
anger was th bonds to ris
Deep liquid lity, as they unchanged.
ng short-term ket. The ne assing massi rkets. Fina and even bil rade, which
bitrage.
2: The Ne
ity crisis, an use the basis
so created g and substan
mal conditio ault on thos d prices whe
hat a lack o e, even thou dity in the C
are unfund While the m CDS prem
et effect is t ive mark-to ally losses w llions) based
allowed for
ew Basis
nd ensuing d s arbitrage t great opport nce of the ba
ons, falling se bonds wa ere falling f
f liquidity c ugh the cred CDS market
ed derivativ e credit crun miums, this that trades t o-market los
went from t d on the lev r bank and h
drop in dem o unravel.
tunities, but asis trade.
corporate b as rising. H
for reasons u
10
caused bond dit risk on th t and the sim ve instrumen nch did sign
effect was hat began a sses as the b the tens of m verage invol
hedge funds
mand for risk However t t the changin
bond prices However, in unrelated to
d prices to f hose bonds mplicity of C
nts) meant t nal rising de dwarfed by as “risk free”
bond market millions of d lved. Basi s to leverag
ky bonds ca the dislocat ng risk prof
should mea n the market o the credit
fall and the “ did not rise CDS (which
that the CD efault risks, y the titanic
” positive c t dislocated dollars to th is arbitrage e, and even
aused prices tion between file required
an the mark t conditions quality of th
“credit prem e by a propo h are related DS market w
which was movements carry trades, d itself from
he hundreds was a “no m ntually led to
s to plumme n the credit d a change i
kets assessm s of the last he bonds.
mium” on ortional d only to was
reflected s in the , suddenly
other of money
o collapse
et and and bond in both the
ment of the quarter of
For
traders who standing on
The new b value of th basis, the n spread. No the new ba defaulting.
By hedging from par, t the CDS re same time of the bond spurious pa the bond co until the bo
There are a recover rat market is t default. S traders from
7 Gosh, A. 2
o were alrea n the sidelin
asis, like th he bond shou
new basis di ot only was t asis focused
.
g the par va traders could eturned the
the trader o d). Instead o
ar asset swa oupon is oft ond either m
a few impor tes are unce hat no matt Second, the
m a basis pa
2009.
ady locked nes, opportu
he old basis, uld be hedg id not focus that not hap d on long ter
alue of a bon d profit from full notiona only paid a p
of receiving ap, traders r ften larger th matures or d
rtant points ertain7. Th ter what the new basis d ackage are l
into basis tr unities wher
involved o ged by the n s on converg ppening, the rm gains po
nd in the CD m the defau al value of t portion of th g a fixed cre
receive the b han the CDS defaults.
to note on t he advantage actual reco does not rel large enoug
11
rades, that m re growing.
opposing tra notional valu
gence of the e opposite te ossible from
DS market, ult of the bon
he CDS (m he par value edit premium
bond coupo S spread, al
the new bas e of fully he overy rate of ly on levera gh that lever
meant huge
ades in the c ue of the CD
e credit prem end was con m the rising p
while the a nd (see figu minus the act e initially (s m on the bo on and pay t llowing trad
sis. First, in edging the p f the bond, t age, per se.
rage is not n
mark-to-m
credit and bo DS. Howe
miums on th ntinuing in t possibility o
actual bond ure 2 bellow
tual recover still receivin ond, determi
the CDS pre ders to recei
a rising def par value of the basis pa The expec necessary.
arket losses
ond market ever, unlike
he bond and the market.
of a bond is
was trading w). If a bond ry rate), whi ng the recov ined by the
emium. A ive a positiv
fault enviro f the bond in ackage retur
cted gains a However,
s. For those
. The par the old d the CDS
Instead, suer
g well away d defaulted,
ile at the very value
now Additionally
ve carry
onment, n the CDS rns par on available to
the upfront y
y,
t
payment on funding co both the bo for those n
Section 3
In this sect method of BRD. I ana as differen curve and t expected p
Traditional been repre LIBOR.
upon the co distribution new way o
The BRD p entering a b The expect
n the bond m osts, reducin
ond and the names nearin
3: Sensitiv
tion I presen presenting alyze the ef nt CDS char the assumed payoffs on a
lly the size sented by d This was su onvergence n of possibl of measuring
plots the an basis packa ted return o
means that ng the positi CDS will b ng default. I
vity Analy
nt a sensitiv a basis pack ffects of diff
acteristics, d recover ra a basis packa
of the basis difference be
ufficient bec e of these tw le returns, d g and analy
nnualized ho age, superim on the packa
players suc ive carry on be great, bot I deal with b
ysis
vity analysis kage, the Ba ferent chara
including th ate on the C
age.
s, and the ex etween the C cause return wo numbers depending up
zing the bas
old-to-defau mposed over age is simply
12
h as banks a n the trade. F th in a syste both of thes
s of a basis p arclays Cap acteristics, s he shape of CDS. I analy
xpected retu CDS spread ns from a tra . Howeve pon the tim sis is impor
ult or hold-to r the default
y the averag
and hedge f Finally, the ematic mark se issues dir
package.
pital® “Basis such as coup the CDS cu yze how thes
urns generat d and the Z- aditional ba er, because t ming of the b
rtant.
o-maturity r t probability ge return on
funds still fa mark-to-m ket wide sen
rectly in the
To do this I s Represent pon size and urve, paralle se character
ted from a b -spread, the asis package the new bas bond’s matu
returns that y implied by n the packag
ace signific arket volati nse, and spe e next two s
I first introd tation Diagr d dirty price el shifts in t ristics affec
basis packag credit prem e are simply sis trade has urity or defa
can be exp y the CDS c ge.
ant ility on ecifically
ections.
duce a new ram,” or e, as well the CDS
t the
ge, have mium above
y based s a large ault, thus a
ected from curve.
e
Fig matures wi marginal p
Figure 2: Th
Figure 3: Th
Initial outlay Annual cash Value on de Value on Re
Note: Data fr
The return
where:
T = CF Dt =
8 Gosh, A. 2
gure 2 bellow ithout defau probability o
he BRD for C
he Basis Pac
y h flow efault
edemption
rom Nov. 11, 2
generated b
= date at wh Ft = bond cou
= discount r
2009.
w, the dotte ult) after a n of default im
Cable & Wire
ckage for Ca
2008, collected
by a basis p
hich the bon upon – CDS rate at time
ed line plots number of y mplied by th
eless 8⅝, 201
ble & Wirele Bond
-£79.0 862.5bp Recovery
£100
d on DataStre
package can
nd defaults o S premium,
t
13
s the annual years (X axi he the CDS
19
ss 8⅝, 2019 C
-40
£100-
eam and Bloom
n be express
or matures, or the net c
ized return s). The lig curve for C
9 CDS
£0 08.5bp -Recovery
£0
mberg.
ed as8:
ending the carry on the
(Y axis) if t ght blue bar Cable & Wir
Ne
-£79 454
£10
£10
basis trade e trade
the bond de r graph bello reless.
et
9.0 4bp 00 00
efaults (or ow is the
The expect
where:
n = pt =
Baclays Ca using CWL different sc examine th DataStream ask premiu B74675, a
The discou Wireless p discount ra
Implied de correspond calculated
Where:
pre D n
ted return o
= maturity d
= probability
apital used C LN because cenarios. T he how diffe m. The aver ums quoted graphic app
unt rate used lc. is based ate used was
efault probab ds with actu
by rearrang
= credi Dt = discoun
pt = cumul n = matu
on the packa
date of the b y of surviva
Cable & W e it’s flat CD
The purpos erent charac rage CDS pr on Novemb proximation
d in calculat in the UK a s taken form
bilities were ual recovery
ging the CD
it premium nt rate at ye lative proba urity of the c
age can be w
bond
al up to time
ireless, 201 DS curve an e of this sec cteristics aff remiums us ber 11, 2008 n of the clos
tions was ta and traded o m the UK D
e calculated y rates. Th DS no-arbitra
for the life ar t
ability of def contract in y
14
written as:
e t implied b
9 (CWLN) nd moderate
ction is not fect the basi sed are the C
8. Bond dat sing price on
aken from th on the Lond Debt Manage
d with a 20%
he marginal age conditio
of the contr fault implie years
by the CDS
as their exa e discount, a to examine is trade. CD Cable & Wi ta was obtai n Novembe
he UK Gilt don Stock E ement Offic
% assumed r default prob on (more lat
ract
ed by CDS c
S curve.
ample trade allows for ea
a particular DS curve dat ireless, plc.
ined from B er 11, 2008 w
strip bond m Exchange. T
ce website (
recovery ra bability (M ter in this se
curve
e. I choose to asy compar r trade, but ta was obta 1-10yrs Sen Bloomberg, b was used.
market, as C The data for
(www.dmo.
ate which ro MPD) can b
ection):
o continue rison across instead to ained from nior CDS bond ID:
Cable &
the gov.uk).
oughly be
Sensitivity
The return are two rea package, w from receiv The effect
Isolating th example. H the CDS m
Figure 4: Se
The figure the returns
y to Change
s on a basis asons for thi which chang ving par pac
of reducing
he change in However, th market and c
ensitivity of t
above show generated b
es in the Di
s package ar is. First, c ges the retur ck on the pa g the market
n market pr he key to fin corporate bo
he basis pac
ws the affec by a basis p
irty Price
re most sens changing the rn on that ou ackage is in t price of th
rice, without nding profit ond market.
ckage to cha
ct of a 25%
package. T
15
sitive to cha e bond price utlay. Sec nversely pro he bond can
t adjusting t on the basi
nges in the b
increase an The table be
anges in the e changes th cond, if the b oportional to be clearly s
the CDS sp is trade is to
bond price
nd decrease i ellow the fig
e dirty price he initial co bond defaul o the marke
seen in Figu
read, is a so o search for
in the (dirty gure shows
on the bon ost of buying
lts the gain t price of th ure 4 bellow
omewhat un dislocation
y) price of th expected re
d. There g a basis generated he bond.
w.
nrealistic ns between
he bond on eturns on
the CWLN the importa on the bon greater the
Sensitivity
The bond c changes in negative, th Changing t and have n
Figure 5: Se
N basis pack ance of the d, the great return on th
y to change
coupon is th n coupons si
he expected the coupon not been inc
ensitivity of b
kage given a gain made er the gain he basis pac
es in coupon
he second b ize represen d returns on is also a pro luded in ou
basis packag
a variety of on the pack on the pack ckage.
n size:
ond charact nt changes in n the basis re oxy for fund ur analysis th
ge to change
16
different ch kage when th kage, and th
teristic I ana n the net car emain can p ding costs, w hus far.
s in the Cou
hange in bon he bond def e earlier tha
alyze. The i rry on the tr positive due
which direc
pon Size
nd price. T faults. The at gain is rea
importance rade. Even e to the disco ctly reduce t
This figure e greater th alized (on d
of this facto n as the net ount on the the carry on
highlights e discount default) the
or is that t carry goes
bond.
n the trade
Notice that bond coupo effect, the still around (bellow fig
Sensitivity
Changing t The implie the 10yr C the implied
Figure 6: Pa
t while chan on produce change in n d 60%. Th gure 5).
y to paralle
the CDS cu ed default pr
DS spread a d marginal p
arallel shifts
nging the bo s only a slig net carry is q his can be se
el shifts in C
urve affects b robabilities affects the n probability
in CWLN CD
ond price pr ght parallel quite signifi een from th
CDS curve:
both the exp change the net carry on of default.
DS curve
17
roduced an shift of the ficant as the he change in
:
pected timin timing of t n the trade, w
exponential curve. De implied sur n expected r
ng of defau the arrival o while earlie
l shift BRD espite the re rvival proba returns on th
ult and the n of par, and th er CDS matu
D curve, chan elatively sm ability after he basis pac
net carry on hus the retu urities help
nging the mall visual 10years is ckage
the trade.
urn. Only determine
Figure 7: Im
Figure 8: Af
The paralle coupon siz large impa blue bars a probability
mplied surviva
ffect of paral
el shift on th ze, both chan act on the m at the bottom y of default
al probability
lel shifts in th
he CDS cur nge the net marginal prob
m of the BR shrinks, the
y with a paral
he CDS curv
rve has a sim carry on th bability of d RD. This m e value of th
18 llel shift in CW
ve on basis p
milar effect e trade. H default, show means for ne he the risky
WLN CDS c
package
on the BRD However, the wn by the d egative shif
cash flow o
urve
D curve as c e shift of th difference b fts in the CD on the basis
changing th e CDS curv etween the DS curve, w package in
e bond ve has a
red and while the ncreases.
The effect growing(sh and a shift
Sensitivity
A more po means a “d CWLN cre rotate the c on short an short or on
Figure 9: Ch
of falling(r hrinking) ne
in the CDS
y of the bas
ositive chang decreasing s edit curve, a credit curve nd long term nly long term
hanging the
ising) impli et carry, as s S curve.
sis to chang
ge in slope m steepness” o as in our bas e around a p m CDS matu
m maturities
slope of the
ied default p shown by th
ges in the sl
means a “st of the credit se case the s
oint. Chan urities, as I
s would also
CDS curve
19
probability he proportio
lope of the
teeper” cred t curve. Th
slope is nea nging the sl have shown o be a chang
is dominate onal relation
CDS curve
dit curve, wh his is relativ ar zero. To c lope does no n. Changin ge in slope.
ed by the eff nship betwe
e:
hile a negat vely easy to change the s ot necessari ng the CDS
ffects of the een expected
tive change o imagine on
slope of the ily mean an S premium o
d returns
in slop n the e curve we n equal shift
on only t
Figure 10: A
Figure 11: A
In this case as implied the net carr curve is a m increased (
Affect of chan
Affect of chan
e, the basis defaults rat ry on the tra more profita (or both).
nging slope o
nges in slope
package be tes are high ade is larger able curve,
on implied su
e of CDS cur
nefits from her early on
r. Even gi as either th
20 urvival proba
rve on basis
the increas (when they iven other m
e default pr
abilities
package
es in the ste y have the gr manipulation robability is
eepness of t reatest effec ns in the cre increased o
the credit cu ct on return edit curve, a or the net ca
urve, both s), and as a steeper arry is
Sensitivity
Recovery r explicitly q implied sur implied sur accurately recovery ra section on
Mathemati
Where:
pre D n The left sid equation, t To balance effect on th
y of the bas
rate assump quoted in th rvival proba rvival proba guess their ate on a bon
mark-to-ma
ically we ca
= credi Dt = discoun
pt = cumul n = matu de of the eq he default l e this we mu he default le
sis package
ptions are un he market.
ability of th ability, thus r assumed re nd after you
arket valuat
an see this b
it premium nt rate at ye lative proba urity of the c quation is th
eg. By rai ust increase eg then the p
e to recover
nlike other f CDS contr he reference
s in order to ecovery rate u have enter
tions.
by looking a
for the life ar t
ability of def contract in y he premium
ising the rec e marginal p
premium le
21
ry rate assu
factors that racts are quo
entity. H o understand
e. Changin ed into the
at the no arb
of the contr fault implie years
leg, which covery rate probability o eg.
umptions:
affect the b oted by thei However, the d your coun
ng market c contract, we
bitrage cond
ract
ed by CDS c
must be equ (R) we dec of default (p
basis. First ir premium, e recovery r nterparties tr conditions c e deal with
dition on a C
curve
ual to the rig rease the va pt – pt-1), wh
t, they are n , which affe rate also aff rue beliefs, can also cha that issue in
CDS contrac
ght side of t alue of the d hich has a gr
not ects the fects the
you must ange the
n the next
ct:
the
default leg.
reater
Figure 12: T
The second recovery ra either the i base case o probability expected re
Figure 13: T
The affects o
d important ates assump initial outlay of a 20% rec y (see the ba
eturns on a
The effect of
of recover rat
t difference ptions have y or the net covery rate.
ar graph at t basis packa
recover rate
te assumptio
between as no direct af carry on th . Recover the bottom o age.
e assumption
22 ons on implie
sumed reco ffect on cash he trade, the
ry rates do, h of the BRD
ns on the bas
d default pro
overy rates a h flows. B BRD curve however, af ) and thus h
sis package
obabilities
and other fa Because they
e remains un ffect the ma have a signi
actors analy y do not eff nchanged fr arginal defau
ficant affec zed, fect affect rom our
ult ct on the
Section 4 The purpos after a basi market val to-market v price of the to-market e actually mo effects of d
It is worth should be l contract va be offsettin For examp rising bond
The initial buyer persp leg must be written as9
Where:
9 Professor
4: Mark-t se of this se is package h
ues are calc value assoc e bond minu effects on th ove in isola different fac
noting that largely offs alue while a ng in sign th ple, when an d value and
market-to-m pective this e zero. As
:
r Shyan Yuan
to-Market ection is to a has been en culated by p
iated with t us the price he CDS leg ation, the ba ctors individ
because ba etting; i.e. a at the same t hey may not n issuers cre cash flows
market valu s means at in
s the CDS c
n Lee, “Cred
t Change analyze the ntered, as op product, and the changing e at which th
of the basis asis is explo
dually is im
asis trade is an increased
time bond v t be in magn edit rating is
on the basi
ue of a CDS nception va curve chang
it Derivatives 23
s in the V mark-to-ma pposed to be d not explici g market pr he bond was
s package. F oiting disloc mportant.
a fully hedg d default ris values are fa
nitude. Also s downgrad is trade, whi
S on inceptio alue of the d ges the mark
s and Structu
Value of a arket risks a efore enterin itly ‘netted’
rice of a bon s purchased Finally, whi cations betw
ged position sk portrayed
alling. Ho o, some cha ed, it trigge ile leaving t
on is always default leg m k-to-market
ured Finance
Basis Pac associated w ng the basis
’ by trading nd is simplis d. Thus, I on
ile it is unli ween market
n, Mark-to-m d in CDS ma owever, whi
anges are un ers step-up c the CDS leg
s zero. Fro minus the va
value of the
e” class note
ckage with changin s package. m activit. T stic, the cur nly analyze kely these f ts, thus unde
market chan arket, increa ile some cha nique to one covenants o g unaffected
om the prot alue of the p
e CDS is co
s, Fall Seme
ng factors mark-to- The mark-
rrent traded the mark- factors will
erstand the
nges ases CDS anges may e market.
on bonds, d.
tection premium ommonly
ester 2008.
Ann pt Dt
I expand th
Where:
Δpr Dt
pt Ψt
R ω The first te market rate the expecte which one the contrac
Mark to m
Changes in First, they spread mat of the carry default we
nuity($) = v = surv = disco his formula
re = change = c = disco = surv = survi = beg = curre erm is simpl
e CDS curv ed payoffs o
counterpart ct value for
market sens
n the CDS le affect the n tching the m y on the bas
change the
value of CD vival probab ount rate at
to calculate
e in carry current mark
ount rate at vival probab val probabi market CD ginning reco ent recovery ly the prese ve. The dif
on default.
ty would pa both parties
sitivity to p
eg of the tra net carry com maturity on
sis package e present val
S premium bility of defa
year t ed based on
ket CDS spr year t bility of defa
ility of defau DS curve
overy rate a y rate assum ent value of
fference bet This chan ay to “tear”
s is zero.
parallel shif
ade affect th ming from t
the bond (th changes.
lue of payof
24
cash paym ault implied
n the change
read - begin ault implied ult in year t assumption mption
the change tween next t nge in mark- up the cont
fts in CDS
he mark-to- the basis pa he 10yr spre
Second, by ffs received
ents and de d by CDS cu
e in fair valu
nning CDS s d by beginni t implied by
in expected two terms i -to-market v tract by brin
curve:
market valu ackage. By ead in this c y changing t d on default.
fault payme urve
ue of the CD
spread ing CDS cu y the current
d cash flows s the chang value is, in e ng it up to m
ue of basis p y raising or case) we cha the expected . While th
ents
DS as:
urve
t
s, implied b e in present effect, the f market value
package in t lowing the ange the pre d timing of he value rec
by the new t value of fair price
e, where
two ways.
CDS esent value
bond eived
never chan years disco
Figure 14: M
As the cred is gained(l contract pr out. Gain because up premium.
Despite the curve, it is asymmetri deterioratio slow and d
nges, par × ( ounted, and
Mark-to-mark
dit curve sh ost). The ga remium and ns from upw pward shifts
e nearly line important t c. This m on in the cre downward v
(1-R), chang thus the ma
ket sensitivity
hifts up(dow ain recorded d the current ward shifts i s increase th
ear relations to remembe means that su edit quality volatility sm
ging the exp ark to mark
y to parallel s
wn), toward d is equal to t market pre in the credit he probabili
ship betwee er that credi udden upwa of the refer mall.
25
pected time et value.
shifts in CDS
the right(lef o the presen
emium, plus t curve are s ty of defaul
en mark-to-m t risk is a on ard shifts of
rence entity
of receivin
S curve
ft) side of th nt value of th s the increas smaller than lt, lowering
market valu ne-sided jum f the credit c y. Whereas d
ng par chang
he horizonta he differenc
sed probabi n losses for the expecte
ues and para mp risk, thu curve are lik downward s
ges the num
al axis, cont ce between t ility of a def downward ed value of
allel shifts in us volatility kely, given a
shifts are ge mber of
tract value the original fault pay-
shifts the credit
n the CDS is
a enerally
l
Mark-to-m
Like parall CDS contr outs. Unl changes. N the same ti The loss on payments.
Figure 15: M
Mark to m Making ma recovery ra implied de
market sen
lel shifts, ch ract, it chang
like parallel Negative cha ime the redu n the reduct
Positive c
Mark-to-mark
market sens ark-to-mark ate is not a q
fault probab
sitivity to c
hanging the ges the pres l shifts, the anges in slo uced premiu tion in prem changes hav
ket sensitivity
sitivity to c ket changes
quoted rate.
bility, and t
changes in t
slope of the sent value o
effects are ope increase ums and inc miums and c ve equal and
y to changes
hanges in t in value ba . As I show thus has an e
26
the Slope o
e credit curv of the credit
offsetting b e the chance creased cum cumulative s d opposite e
s in the steep
the recover ased on chan
ed before re effect on th
of the CDS
ve has the t premium an based on the e of early de mulative surv
survival dom effects.
pness of the
ry rate:
nging recov ecovery rate
e fair value
curve:
wo effects o nd the prob e structure o efault payme
vival rates r minates the
CDS curve:
very rates is es have a sig
of the CDS
on the fair v bability of de of our steepn ents, a gain reduce cont gain on def
tricky beca gnificant ef S contract.
value of a efault pay- ness
, while at tract value.
fault
ause the ffect on the
The recove volatility is entity issue Recovery r lower reco recovery ra single nam
Figure 16: M
Mark-to-m basis packa may fall si the scenari prepared fo outs becom
ery rate on a s relatively es more deb rates are als very rates, w ates, in gene me CDS is la
Mark-to-mark
market chang age. How gnificantly io in which or significan me more like
a bond is les symmetrica bt (reducing so related to while perio eral, are ver arge.
ket sensitivity
ges in value ever, these as credit ris a basis hold nt mark-to-m ely.
ss volatile t al. Larger g recovery ra o the default
ds with low ry idiosyncr
y to changes
e tend to mo changes are sk increases der receives market vola
27
than the cred changes in ates) or reti t cycle. Peri w default rat ratic and the
s in the recov
ove in the op e not necess s; however, s the largest atility, and e
dit premium n recovery ra res debt (in iods with hi tes have hig e variance o
very rate
pposite dire sarily bad fo
this means t pay-out.
expect volat
m, however ate are likel ncreasing rec
igh default r gh recovery
on realized r
ection expec or the basis companies Thus basis tility to incr
unlike CDS ly when a re covery rates rates tend to rates. How recovery rat
cted returns investor. B
are closer t holder mus rease as def
S premiums eference
s).
o have wever, tes for
on the ond prices to default, st be fault pay-
s
Section 5
One possib contract to entering in in which th intervening effective d exchanged mathemati
The CDS n (value to a slightly to
Where:
5: Basis p
ble modifica buy protec nto a forwar he CDS con g period. T date is later t d until after t cally below
no-arbitrage protection get the no a
n = the co k = the co pt = the cum Φt = cumul
= [the su from 0
=(probab = [pt – p
ackage us
ation to the ction in the f d CDS cont ntract is effe The forward than a vanil
the effectiv w:
e condition sell must eq arbitrage co
ontract matu ontract effec mulative de
ative probab um margina
to k] divide bility of def pk)] / (1 - pk)
sing forw
basis packa future at a p tract today, ective, but a d CDS cont lla CDS wh ve date, even
above, state qual the val ondition for
urity date ctive date efault probab
bility of def al default pr
ed by proba fault from k )] (by Baye
28
ward CDS
age is using pre-specified
the CDS tra assumes the
tract is also ile having t n if the refer
es that the p lue to a prot a k to n yea
bility fault condit robabilities ability of sur k to t) / cum
s’ theorem)
forward CD d premium ader locks i risk of CD of a shorter the same ma rence entity
premium leg tection buye ar forward C
tional on sur from k to t a rvival from mulative surv
)
DS. A For for set leng in a lower p S spread ch r duration, a aturity date.
y defaults. I
g must equa er). I mod CDS:
rvival until and the prob 0 to k vival probab
rward CDS gth of time.
premium for hanges in the
as the contra . No prem
show this r
al the defaul dify this con
t=k
bability of s bility at k
is a By r the period
e act’s miums are
relationship
lt leg ndition
survival
The net eff premium.
credit prem pictured m
Figure 17: C
A basis pac the forward loss in the the BRD fo which is th defaults be increased c basis packa
fect is that t Figure 17 mium falls, a mature in 10
Changes in t
ckage holde d CDS. Th
event of an or different he same as a efore the eff carry) if the age quickly
the orward C shows that assuming th
years).
he CDS prem
er, however hus while th n un-hedged
forward CD a vanilla CD fective date e bond matu y decreases b
CDS contra t as k, the ef he final mat
mium for forw
r, must assu he net carry d default dom
DS contract DS. In eac of the forw ures or defau
bellow zero
29
acts with late ffective date turity date o
ward CDS co
me the cred y on a basis minates the t options.
ch case, the ward CDS, b ults after the o as the effe
er effective e of the con of the contra
ontracts
dit risk on th package wi
gain off the The base ca returns are but positive e effective d
ctive date is
dates have tract, becom act is unchan
he bond unt ith forward e carry. Fi ase is a 0x1
highly nega and slightly date. The s extended.
lower the c mes further nged (all co
til the effect CDS is incr igure 18 bel 0 year forw ative if the b y higher (du expected re
credit distant, the ontracts
tive date of reased, the llow shows ward CDS,
bond ue to the eturn on the
Figure 18: B
While usin basis packa negative sl are based o can be com estimated r quickly the will be trem
Basis pack the credit q effective d More impo
BRD for CWL
ng forward C ages are the lope, forwar on the condi mparatively recovery rat e loss will b mendous.
kages utilizin quality of th date of the F ortant, if the
LN with Forw
CDS on the e same. In rd CDS redu itional marg
small. Gi tes, the astu be minimal,
ng forward he reference FCDS, using e investor ha
ward CDS
Cable & W n cases of ex
uce the carr ginal defaul iven that bo ute trader co
while if it d
CDS can al e entity. If g an FCDS g
as some con
30
Wireless bas xtreme cred ry on the tra lt probabilit nd prices on ould purchas defaults afte
lso be usefu f an investor greatly incr ntrol over th
is package m it risk, wher ade significa ties, which,
n extreme ri se a bond w er the effect
ul if the inve r is sure the reases the ca
he timing of
may not be re the credit antly. For
in the case isk names c with the expe
tive date of
estor has in e firm will n ash flow on f the default
a good idea t curve has rward CDS of steep cre can hover at ectation if it the FCDS,
side inform not default b
the basis p t of the refe
a, not all an extreme premiums edit curves t or around t defaults
the gain
mation on before the
ackage.
erence
entity, grea The next se
Section 6
The pay-ou finance lite refinancing credit defa this section scenarios a predatory b
At the mos of lenders.
or liquidati CDS contr raising the contract on loan issuan
The key fa refinanced CDS pricin
at profits ca ection deals
6: How CD
uts and strat erature. A g or liquidat ault swaps ar n I briefly d as illustratio
behavior an
st fundamen When ch ing a loan, a racts lower’
liquidation n an ex ante nce on an ex
actor in this , or liquidat ng and impl
an be achiev s directly w
DS Chan
tegies for le A creditors o tion and his re fundame discuss how
ons of this c nd the affect
ntal level, cr hoosing the
and make th s lenders pa n payoff if th e basis, and
x post basis.
equation is ted. Every lied surviva
ved by ‘guid ith this kind
ge the Ru
enders and b optimal cont
s beliefs abo ntally chang
CDS affect change. I foc
t of changin
redit default optimal deb heir contrac ayoffs if it c he firm defa
changes the .
that it is wi ything discu al probabilit
31
ding’ the de d of manipu
ules of the
bond holder tract is base out the lend ging the rel t this relatio cus primaril ng capital str
t swaps are bt contract, ct decision b choose to re aults. By d e lenders de
ithin the len ussed in the ies, has assu
fault past th ulations.
e Game
rs are relativ ed on his inf der’s reactio
lationship b onship broad
ly on the ba ructures on
changing th lenders esti based on the efinance a po
definition th ecision if CD
nder’s powe previous se umed that d
he effective
vely well de formation se n set. As etween cred dest sense. I asis trade, in basis holde
he optimal c imate their p ese factors.
oorly perfor his changes DS contract
er to decide ections up to default timin
date on the
efined in rec et, payouts a hedging in ditor and de
I use severa ncluding hed ers.
contracting payoffs on r The prem rming firm, the lender’
ts are entere
if the firm o this point, ng is indepe
e FCDS.
cent on
nstrument, ebtor. In
al different dging,
decisions refinancing mium on
, while s optimal ed into after
is
, including endent and r
beyond the literature.
Scenario 1
In this scen
“senior sec forms of de the loan is not have su capital mar
I analyze th renegotiati
e influence o
1: The hedg
nario the ba cured,” in th
ebt. Howev less than th ufficient liq rkets. Thus
his scenario ion standpoi
of creditors
ged loan
ank has an o hat it has pri ver, it is still
he face valu quidity to rep
it is the ban
o not from a int. Clearly
. Clearly
outstanding ior claim on l impaired s ue. The cre
pay the outs nks decision
an optimal c the banks b
32
that does no
credit line w n the recove such that in
edit line is s standing ba n to roll ove
contracting best option i
ot conform
with an ‘at r erable assets the event of set to mature alance, nor d
er the loan o
framework, is to roll ov
to other are
risk’ firm. T s of the firm f default, th e after time does it have or force the
, but from a ver the loan
eas of the fin
The credit li m, compared he liquidatio e 1, but the f access to o company to
an ex post in this situa
nance
ine is d to other on value of
firm does other
o default.
ation.
By hedging such that th option, to r on the bank market con
This hedgi entire loan
Scenario 2
Section 3 c are calcula influence o default tim
g it’s loan b he bank’s o roll over the ks loan boo nditions and
ng need not n book may
2: Predator
clearly show ated using th on the defau ming on bond
book in the C ptimal deci e loan, leave ok. While d clearly sho
t be done in also have si
ry behavior
ws that basis he implied s ult timing of ds, abnorma
CDS marke sion is to re es the bank this may be ows how CD
n the single imilar payo
r by basis h
s holders be survival pro f the referen al returns ca
33
et, the bank efuse to roll with no net e a somewha
DS are chan
name CDS ut profiles t
holders and
enefit from obabilities, w
nce entity.
an be made.
has drastica over the cr t profit whil at extreme e nging the re
market, ind to scenario
d the effects
early bond which assum
If the basi .
ally change redit line.
le credit risk example, it elation betw
dex based h 1b.
s of capital
default. R me the prote s holder has
d its payout The banks k of the firm
is not far fr ween bank an
edges on a b
l structure
Returns on th ection buyer
s influence
t structure alternate m remains rom current nd creditor.
banks
changes
he basis r has no over the
In general, of investor holders can of investor Second, wh that’s nece very impor broken cov
Exchange o timing of d become a r offers can forms of ex bond inves
because bo rs, bondhold n gain signi rs, either by hile absolut essary to for rtant. Eve venant class
offers are o default. Be
relative com come in ma xchange off stors vs. pay
onds are arm ders have le ificant influ y private pla te control m rce a compa n if bonds c sifies as a de
one example ecause of re mmon corpo any forms, d fers. The k yoffs to basi
ms-length tr ess control o
ence in seve acement on i may be impo any into defa
can be reneg efault and tr
e of a decisi ecent develo orate action
debt for equ key to unde is holders.
34
ransaction b over firm re eral ways.
issuance or ossible, veto fault. Thus gotiated ind riggers CDS
on in which opments in
for firms fa uity, debt fo erstanding th
between sing financing d First, bond
aggressive o power ove s the voting dividually, a S payment.
h a bond hol the credit m acing signifi r senior deb his scenario
gle issuer an decisions.
ds can be he open marke er refinancin g rules for bo a single mis
lder can gre markets, exc ficant defaul bt and debt o is the diffe
nd a dispers However, b eld by a sma et operation ng decisions ond holders
sed paymen
eatly influen change offer lt risk. Ex swaps for c erence is in
sed group bond/basis
all number ns.
s is all s can be nt or
nce the rs have xchange cash are all
payoffs to
Clearly sce offered by mark-to-m block the e open mark ABC comp
enario 2a re the compan market basis) exchange of ket operation
pany retires
epresents a l ny in exchan ) from the e ffer. Alter ns, however none, or on
loss to holde nge for thei exchange off
rnatively AB r the increas nly a portion
35
ers of the A ir bonds. O ffer. Thus,
BC compan se in deman n of its debt
ABC basis p On the othe , if possible y could see nd would aff
t scenario 2
ackage, des r hand bond ABC basis k to purcha ffect market 2b begins.
spite the pre d holders ga s holder will ase its debt t
price of de emium
ain (on a l seek to through
bt. If
In scenario lose the mo basis packa bond.
Scenario 2 exchanges, generally l senior secu scenario 1 as straightf change wh
o 2b, if ABC ost. If AB age, while b
has been p , and will li leave basis h ured debt fo
like situatio forward wh hen compare
C defaults b BC does not bond holder
layed out m kely contin holder wors or unsecured
on. In gen hen hedged i ed to previo
basis holder’
default bas rs receive th
many times o nue as the de
se off, howe d debt gener neral, negoti investors, li ous default c
36
’s receive th sis holder’s he larger cou
over the las efault cycle ever the cha rally adds v iations surro ike basis ho cycles befor
he maximum continue to upon, but fa
t year as co heats up.
ange is diffic value for bas
ounding exc lders, are pr re the adven
m payout, w receive the ace mark-to
ompanies of Equity for cult to quan sis holders, change offe resent. Th nt of credit d
while bond h e positive ca o-market risk
ffer cash for debt exchan ntify. Exch as they mov ers are unlik
his is a signi default swap
holder’s arry off the
ks on the
r debt nges hange ve into a kely to be
ificant ps.
Conclusi Any seriou We should in late 200 towards ze
Despite the package. E as increase Opportunit
Figure 19: T
Initial outla Annual cas Value on d Value on R
Note: Data fr Figure 20: T
Expected re
As expecte same time
ion us dislocatio d expect the 8 to revert o ero. Howe
e rally in the Expected ret
ed to nearly ties for prof
The Basis Pa
ay sh flow default Redemption
rom May 22, 2 The BRD for
turns on the
ed the increa the smaller
on between large disloc over time. W ever markets
e credit mar turns on the
600bps, wh fit taking rem
ackage for C
R
2009, collected CWLN as of
CWLN basis
ase in the m r CDS prem
markets, su cations in th We should e s to not alw
rket, CWLN e basis pack
hile at the sa main.
able & Wirel Bond -£90.5 862.5bp Recovery
£100
d on DataStrea f May 22, 20
s package = 4
market price mium increas
37
uch as the ba he bond mar expect basis ways move a
N continues age have di ame time th
ess 8⅝, 201 C -22
£100-
am and Bloom 09
4.63%
of the bond ses both the
asis, can be rket, which s returns on as expected,
to present iminished an he bond con
9 CDS
£0 25.7bp -Recovery
£0
mberg.
d has lower e size of the
e expected to occurred d a basis pac and this pr
attractive re nd the posit ntinues to tra
Ne -£90 636.
£10
£10
ed the retur positive ca
o revert ove during the cr ckage conve rocess is stil
eturns on a b tive carry on ade at a disc
et 0.5
8bp 00 00
rn on defaul arry and the
er time.
redit crisis erge
ll ongoing.
basis n the trade count.
lt. At the risk
