固定收益证券课件Lecture12.ppt

Credit Default Swaps & Review,Lecture 12,DR. ANDREW AINSWORTH,FINC3019 FIXED INCOME SECURITIES,Credit Default Swaps & ReviewL,Last week,Interest rate swapsComparative advantagePricingEurodollar futuresWhat are they used for?Australian swap instrumentsBBSWOIS,Last weekInterest rate swaps,Introduction,Credit default swaps (CDS)What are they?Why are they used?PricingReading Sundaresan Ch 18Review lectureExam formatContentWhat have we learned this semester,IntroductionCredit default swa,Credit Default Swaps,Credit Default Swaps,CDS,CDS allow one counterparty to increase their exposure to the credit risk of a given 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 either 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 active,CDSCDS allow one counterparty,Participants in the CDS market,There 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 both 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 rated,Participants in the CDS market,Types of credit events,The three most important credit events are:BankruptcyFailure to pay outstanding debt obligationsRestructuringFull restructuringModified restructuringDouble modified restructuringNo restructuring Other credit events of lesser importanceRepudiation or moratoriumObligation accelerationObligation default,Types of credit eventsThe thre,Settlement,Contracts 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 buyer 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 difficulty that arises is how to fairly determine the value of the reference obligation,SettlementContracts can be set,What happens after a credit event occurs?,Protection Buyer,Protection Seller,Par value of obligations,Protection Buyer,Protection Seller,A: In the absence of a credit event,CDS Premium per quarter until maturity,B: If a credit event occurs,Defaulted obligations,What happens after a credit ev,Valuing a CDS,The 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 notional 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 seller,Valuing a CDSThe notional prin,Valuing a CDS,As with interest rate swaps, the present value 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 paymentValue 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 CDS,In determining the present value of the fixed leg, we need to take account of the probability that the firm will survive until that quarterly paymentFor 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 thing 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 determining th,CDS spreads,CDS spreads,CDS spreads,CDS spreads,CDS spreads,CDS spreads,CDS spreads,CDS spreads,CDS spreads,CDS spreads,Review lecture,Review lecture,Topic 1: Introduction,Types of debt trading volume, issuance outstandingParticipantsRisks of investing in fixed incomeLiquidity risk, interest rate risk, etcRisk-return historyPrimary and secondary markets,Topic 1: IntroductionTypes of,Topic 2: Bond pricing,CGBsSettlement 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 incomeHolding period returnRelationship between yield, price and coupon rate,Topic 2: Bond pricingCGBs,Topic 3: Duration and convexity,Measures of bond price volatilityPrice value of a basis pointMacaulay durationModified durationHow to immunise using durationConvexityWhat does it measure?You wont have to calculate this in the examEffective durationRelevance for bonds with embedded options,Topic 3: Duration and convexit,Topic 4: Term structure of interest rates,The yield curveWhat are some issues in selecting U.S. Treasury securities to plot the yield curveFactors affecting the yield curve (Litterman and 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 int,Topic 5: Models of the term structure,Estimating 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 using a binomial tree,Topic 5: Models of the term st,Topic 6: Corporate debt and credit risk,Credit 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 of defaultUnderstand the broad intuition,Topic 6: Corporate debt and cr,Topic 7: Bond portfolio management,Benchmark indices and tracking errorPassive bond portfolio managementHow does a portfolio manager achieve index returnsActive bond portfolio managementDifferent trading strategies used by active managersButterflies, riding the yield curvePerformance evaluation of bond fund managersAre they worth the money they are paid?,Topic 7: Bond portfolio manage,Topics 8 & 9: Securitisation,MortgagesRisks and cash flows (i.e. calculation question on interest payments)SecuritisationThe process how does it 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 & 9: SecuritisationMo,Topic 10: Interest rate futures,Forwards 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 futures,Topic 10: Interest rate future,Topic 11: Interest rate swaps,Interest rate swapsHow are they used?How is the swap rate determined? Risks inherent in swap contractsInterest rate swaps in AustraliaBBSWOIS,Topic 11: Interest rate swapsI,Topic 12: Credit default swaps,What are they?How do they work?Should you be buying bonds issued by Ford?,Topic 12: Credit default swaps,Exam format,2 hoursAttempt all questions30 MCQTheory and calculation questions5 short answerSimilar to mid-semesterDiscussion and calculation questions,Exam format2 hours,Hints and tips,Ive mentioned many useful hints and tips during semesterLecture notesTutorialsText books (where relvant)Ive mentioned several current market developments relevant for the course throughout the semesterThese are examinable to the extent they were discussed in classSee material posted in the Additional Resources folder (that was discussed in lectures)Ill put some practice exam questions up on Blackboard before the examIll also post additional consultation hours on Blackboard,Hints and tipsIve mentioned m,What you should know,What you should know,