CDS and CLN by Edu Pristine

Author of lecture CDS and CLN

Edu Pristine

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... seller of CDS will compensate the buyer in case of a credit event. Buyer of swap pays a premium for the insurance cover whereas the seller will compensate only in case there is a credit ...

... 5 Yr CDS on Tata Steel is quoted at 75/85. Investor can buy protection (i.e. go short the credit) by paying the market maker 85bp credit spread. Investor can sell protection on Tata Steel ...

... on the reference asset minus the expected recovery. Post the Credit Event, the CDS terminates and no further payments are made by either party 4 Physical Settlement Mechanics. Cash Settlement: Protection seller makes a single cash payment equal to par value minus ...

... CDS owner need not own the underlying reference asset thus does not need to have an insurable interest. Right to recovery remains with the owner of the reference asset. Two (netting) cash payments. The Swap Notional (i.e. USD 5m). The value of the Deliverable Obligation (say 40% of USD 5 m). An auction mechanism (of the Reference Obligation) is utilized to determine ...

... Triggering a Credit Event will involve public information of a material event with respect to one of their Obligations. Once credit event has occurred, any Obligation of the Reference Entity, which meets a range of criteria ...

... No trigger on protection contract. Publicly Available Information.  ...

... Instead of assets, CDSs are most often based on reference name, or the legal entity corresponding to specific issuer. Reference Obligation Reference Obligation is pre-specified obligation issued or guaranteed by the Reference Entity. A single name CDSs covers a default on any eligible obligations ...

... To mitigate settlement risk, physically settled CDSs often specify deliverable obligations that go beyond the reference asset. Deliverable Obligation. The buyer of protection can deliver any qualifying obligation of the reference entity. The Reference Entity may have issued a great variety of bonds and protection sellers would like ...

... Defined Events that trigger performance by the Seller under the swap. Standard events are: 1. Bankruptcy is the occurrence of any one of certain events specified in the Credit Default Agreement related to the insolvency of the entity (including administration, winding up, dissolution, institution of insolvency proceedings. 2. Failure to Pay: This covers non-payment by ...

... to take action but may or may not have done so. 5. Repudiation or debt moratorium: this relates to the position where the reference entity or the ...

... name as opposed to CDSs, where the credit event is fairly broad. CDSs usually is triggered by an event of default declared publicly while insurance can be triggered by a non-disclosed event. Extent of coverage and exit option: CDSs terminates ...

... Which default can trigger the cash flow, describes the basket product. Nth to Default: The nth default in the portfolio triggers the CDSs pay off. Senior and Subordinated Basket CDSs: (Multiple asset basket product) Senior piece of reference assets form the senior basket while the subordinated piece ...

... After the first name defaults, the investor has no further exposure to other names in the basket. Investor Risk is greater than the risk of buying a CLN linked to one name only ...

... default would be cheaper would depend on the default correlation between reference entities. E.g., 4 reference entities covered by 1st to default and have default correlation of 100%. The fair price would be the same as premium ...

... Tra x x CDS index was created. Since then other regional indices, sub- indices and other variations have become popular. Some Tra x x indices have 125 equally weighted credits based on polling of market participants. ...

... including the maturity value is credit linked to the performance of the specified underlying asset. No credit event situation: The investor receives scheduled P&I. In the event of default: issuer can withhold interest or part of ...

... CLNs can be issued by financial institutions or by SPVs 18 Special Purpose Vehicle CDS Counterparty (Protection Buyer) Highly Rated Collateral Investor (Protection Seller) LIBOR + 150 bp (pa) Coupon 150 ...

... a cash amount equal in value to a Reference Obligation, 19 CLN Mechanics Explained Comments. What is a CLN? What risk is created? A CLN creates, in essence, a synthetic bond. CLNs are similar to funded CDS. The investor takes both the risk of the collateral and the risk of the CDS. Why CLNs? CLNs are interesting for investors looking to ...

... 7% Coupon for 5 Years Investor Bond 100 Investor CDS (protection buyer) 100 Riskless Swap, or Deposit 4% 300 bps for 5 Years ...

... In both cases, the investors is left holding a defaulted bond. Investor left holding a defaulted ...

... paid (S - X) bps for taking on the bonds credit risk. If Libor flat funding is assumed (i.e. X = 0), then the Asset Swap Spread is a close proxy for the Default ...