固定收益证券课件Lecture-12

1、Credit Default Swaps & ReviewLecture 12 DR. ANDREW AINSWORTHFINC3019 FIXED INCOME SECURITIESCredit Default Swaps & ReviewLLast weekInterest rate swapsComparative advantagePricingEurodollar futuresWhat are they used for?Australian swap instrumentsBBSWOISLast weekInterest rate swapsIntroductionCredit

2、default swaps (CDS)What are they?Why are they used?PricingReading Sundaresan Ch 18Review lectureExam formatContentWhat have we learned this semesterIntroductionCredit default swaCredit Default SwapsCredit Default SwapsCDSCDS allow one counterparty to increase their exposure to the credit risk of a g

3、iven entity and the other counterparty to reduce their credit exposureThey are privately negotiated insurance contractsThey trade in an OTC marketA CDS is written over a “reference entity”Greece, Ford, Macquarie Bank, etcProtection buyer: pays a periodic fixed fee to the protection seller until eith

4、er maturity or a the occurrence of a pre-specified credit eventEffectively short the underlying obligation/reference entityProtection seller: pays compensation to the protection buyer if a pre-specified credit event occursCDS vary in their maturity from 1 to 10 years although 5 years is the most act

5、iveCDSCDS allow one counterparty Participants in the CDS marketThere has been substantial growth in the CDS market from $3.6 trillion in 2003 to $32 trillion by 2007Banks are the main players in the marketProprietary trading desksLoan portfolios buying protectionHedge funds are also prominent as bot

6、h buyers and sellersInsurance companies are also active sellers of protectionThe majority of reference obligations are non-sovereign (90%) 60% of the obligations are investment grade20% of the obligations are not ratedParticipants in the CDS marketTypes of credit eventsThe three most important credi

7、t events are:BankruptcyFailure to pay outstanding debt obligationsRestructuringFull restructuringModified restructuringDouble modified restructuringNo restructuring Other credit events of lesser importanceRepudiation or moratoriumObligation accelerationObligation defaultTypes of credit eventsThe thr

8、eSettlementContracts can be settled by physical delivery or cash settlementPhysical: protection seller purchases the distressed bond from protection buyer at parProblem if the market for bond is not liquid (e.g. due to bankruptcy)There are more CDS traded than there are underlying obligationsThe buy

9、er of the credit protection has a choice as to what debt obligation to deliver upon a credit eventThere will be a cheapest to deliver obligation (bond)Cash: difference between the notional principal of CDS and value of reference obligation (on same notional principal) is paid by protection sellerOne

10、 difficulty that arises is how to fairly determine the value of the reference obligationSettlementContracts can be setWhat happens after a credit event occurs?Protection BuyerProtection SellerPar value of obligationsProtection BuyerProtection SellerA: In the absence of a credit eventCDS Premium per

11、quarter until maturityB: If a credit event occursDefaulted obligationsWhat happens after a credit evValuing a CDSThe notional principal generally ranges between $10m and $20mThe periodic fixed fee is referred to as the CDS spreadDont confuse it with a yield spreadThe spread is relative to the notion

12、al principalSpread payments are made in quarterly instalmentsA 40 basis point spread on a $10m notional principal means that the protection buyer is paying $10,000 in quarterly instalments to the protection sellerValuing a CDSThe notional prinValuing a CDSAs with interest rate swaps, the present val

13、ue of each side of the swap must be equal when the swap is entered intoThe fixed leg: buyer makes periodic payments of the CDS spreadThe contingent leg: the protection seller makes one payment if a credit event occursThe recovery rate (R) is important as it determines the value of the contingent pay

14、mentValue of contingent payment = notional principal x (1-R)The value of a CDS to the protection buyer (PB) is:Valuing a CDSAs with interest Valuing a CDSIn determining the present value of the fixed leg, we need to take account of the probability that the firm will survive until that quarterly paym

15、entFor the contingent leg we need to take account of the survival probability as that will determine when the contingent payment is made after the credit eventNote: the survival probability is 1 the probability of the firm defaultingIf you really want more equations see pp. 389-390The important thin

16、g to note is that there is an implicit probability of default in the pricing of a CDS contractAs the probability of default increases the CDS spread will also increaseThere is also an estimate of the loss given default inherent CDS pricingThis is generally assumed to be 40%Valuing a CDSIn determinin

17、g thCDS spreadsCDS spreadsCDS spreadsCDS spreadsCDS spreadsCDS spreadsCDS spreadsCDS spreadsCDS spreadsCDS spreadsReview lectureReview lectureTopic 1: IntroductionTypes of debt trading volume, issuance outstandingParticipantsRisks of investing in fixed incomeLiquidity risk, interest rate risk, etcRi

18、sk-return historyPrimary and secondary marketsTopic 1: IntroductionTypes of Topic 2: Bond pricingCGBsSettlement vs quoted price and accrued interestInteger and non-integer period to maturityZero coupon bonds, T-bills and reposMeasures of yieldCurrent yieldCoupons, capital gains and reinvestment inco

19、meHolding period returnRelationship between yield, price and coupon rateTopic 2: Bond pricingCGBsTopic 3: Duration and convexityMeasures of bond price volatilityPrice value of a basis pointMacaulay durationModified durationHow to immunise using durationConvexityWhat does it measure?You wont have to

20、calculate this in the examEffective durationRelevance for bonds with embedded optionsTopic 3: Duration and convexitTopic 4: Term structure of interest ratesThe yield curveWhat are some issues in selecting U.S. Treasury securities to plot the yield curveFactors affecting the yield curve (Litterman an

21、d Schenkman)Economic news and bond prices (Balduzzi, Elton and Green)The term structure of interest ratesSpot rates (bootstrapping)Forward ratesTheories of the term structureExpectations, liquidity premiumSTRIPS marketWhy would you want to hold zero coupon bonds?Topic 4: Term structure of intTopic 5

22、: Models of the term structureEstimating the spot curve using binomial treesMultiplicative random walkMean revertingSelected theoretical models of the term structureWhat constitutes a good model?Properties of different modelsVasicek, CIR, Ho and LeeEffective duration revisitedValuing a callable bond

23、 using a binomial treeTopic 5: Models of the term stTopic 6: Corporate debt and credit riskCredit risk and defaultWhat are they?What factors affect recovery ratesCredit ratings agenciesWhat role do they play in fixed income markets?How do they do this?What determines credit ratings?Structural models

24、 of defaultUnderstand the broad intuitionTopic 6: Corporate debt and crTopic 7: Bond portfolio managementBenchmark indices and tracking errorPassive bond portfolio managementHow does a portfolio manager achieve index returnsActive bond portfolio managementDifferent trading strategies used by active

25、managersButterflies, riding the yield curvePerformance evaluation of bond fund managersAre they worth the money they are paid?Topic 7: Bond portfolio manageTopics 8 & 9: SecuritisationMortgagesRisks and cash flows (i.e. calculation question on interest payments)SecuritisationThe process how does it

26、work?Credit enhancementsPrepayment risk: what are the models and how do they effect cash flowsGuest lecture from the David Olivan (RBA)As you know there will be at least one question in the final exam on thisCollateralised debt obligations (CDOs)What was their role in the financial crisis?Topics 8 &

27、 9: SecuritisationMoTopic 10: Interest rate futuresForwards versus futuresU.S. Treasury futuresWhat are the delivery optionsWhat is basis, cost of carry and basis after carry? How do they relate to arbitrage?Eurodollar futuresAustralian interest rate futuresSettlement30-day interbank futuresTopic 10: Interest rate futureTopic 11: Interest rate swapsInterest rate swapsHow are they used?How is the swap rate determined? Risks inherent in swap contractsInterest rate