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CDS Delivery Option: Better Pricing of Credit Default Swaps

ISBN: 978-1-57660-263-8
224 pages
January 2009
CDS Delivery Option: Better Pricing of Credit Default Swaps (157660263X) cover image
For traders trying to navigate the increasingly volatile credit default swap market, CDS Delivery Option provides worked-out examples, over 30 charts, a case study of Delphi, and detailed explanations of how the subprime crisis caused the credit crisis and the near collapse of the GSEs.  The book includes detailed information on:
  • how to value a CDS contract
  • how to value the delivery option
  • how contract value changes when the yield curve flattens or becomes steeper
  • how contract value changes with bullish or bearish market moves
  • how to figure out when to buy protection and when to sell protection
  • how to hedge CDS risk
  • when and how to unwind a contract prior to settlement
  • when to hold a trade through delivery
  • how to navigate a "squeeze" (when the notional value of contracts going through delivery is larger than the supply of the cheapest-to-deliver issue)
  • when buying contracts can make their prices go down
  • how to construct a basis trade
  • how to find arbitrage opportunities
  • how to analyze default probability and corporate debt
  • when to settle via auction and when to settle via physical delivery
  • which note is the cheapest to deliver

This book is an indispensable resource for all market professionals working in the CDS market.

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List of Illustrations.

Introduction.

Part I Markets and Mechanisms.

Chapter 1 Interest Rate Policy, Housing Prices, and the Credit Crunch.

An Unspoken Assumption.

The Music Stops in Home Prices.

The Music Stops in Lending.

The Music Stops on Wall Street.

Fed in a Box.

Chapter 2 The Crisis After Subprime.

Agencies Born of Crisis.

Contradictory Objectives?

The Golden Goose.

Losing Focus.

Chapter 3 The Link Between Credit Derivatives and Bonds.

Caulis Negris.

The Music Stops for the Agencies.

The End Game for the Government-Sponsored Enterprises.

Part II The Delivery Option.

Chapter 4 Delivery Option: The Link Between Futures and Credit Derivatives.

Assumptions Behind the Credit Default Swap Basis.

Default Probability, Corporate Debt, and the Delivery Option.

A Review of Treasury Futures Mechanics.

Pricing Treasury Futures Delivery Options.

The Fair-Value Method for Pricing an Embedded Option.

Chapter 5 The Squeeze.

Making Mischief.

Distorted Economics.

Chapter 6 The Cheapest-to-Deliver Option in Credit Default Swaps.

Quantifying the Value of the Delivery Option.

A Proof by Contradiction.

Applying the Fair-Value Analysis.

More Lessons from the Futures Market.

Chapter 7 Delphi: A Real-World Example.

Recent Developments: Destroying Value.

Part III Contract Design.

Chapter 8 Designing an Agency Credit Derivatives Futures Contract.

Chapter 9 Bringing the Index to an Exchange.

Part IV A Bear Market Case Study.

Chapter 10 The ABX Meltdown.

Index.

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David Boberski is executive director and head of exchange-traded derivative strategy within Prime Services at UBS Investment Bank. Institutional Investor has named Boberski to its All-American Fixed-Income Research Team for his work in federal agency debt and interest-rate derivatives. Boberski is also the author of Valuing Fixed Income Futures.
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