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Table of Figures
by David Boberski
CDS Delivery Option: Better Pricing of Credit Default Swaps
Title Page
Copyright Page
Dedication
Table of Figures
Introduction
The Credit Crunch of 2007
Rapid Growth in the Credit Derivatives Market Explained
The Delivery Option
Physical Delivery Links Markets
Bridging the New York/Chicago Divide
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
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
ABOUT THE AUTHOR
ABOUT BLOOMBERG
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Table of Figures
Figure 1.1
Growth of the Corporate and Credit Derivatives Martket
Figure 1.1
Slope of the 2-Year and 10-Year Treasury Curve by Business Cycle
Figure 1.2
S&P Case-Schiller Home Price Index
Figure 3.1
Chinese Holdings of U.S. Treasury and Agency Notes
Figure 3.2
2-Year Treasury Note Yields Versus the ABX Index
Figure 4.1
CDX vs. Interest Rate Swap Spread
Figure 4.2
Empirical Perfomance of Treasury Bond Contracts Compared to Cheapest-to-Deliver issue
Figure 4.3
Long Bond Contract Perfomance Relative to Cheapest-to-Deliver Issue
Figure 4.4
Principal Components Decomposition of 2-, 5-, 10-Year Treasury Note Curve into Primary Drivers of Volatility
Figure 5.1
Deliveries at the CBOT vs. Issurance of Treasury Debt
Figure 5.2
Fails Data
Figure 6.1
Debt Distrubution for Fannie Mae
Figure 6.2
Performance of a 5-Year Note and a Delivery Option Basket with Thirty Years’ Worth of Maturities
Figure 6.3
Example of a Binomial Tree with Equal Jumps at Each Increment
Figure 6.4
Binomial Tree Built With Equal Probabilities
Figure 6.5
Contrasting Two Binomial Tree Constructions
Figure 6.6
Fannie Mae Debt Distribution With Yield Curve Overlaid
Figure 6.7
Price and Yield ot the CTD Note vs. Lowest Issue
Figure 6.8
Underperformance of the CTD Compared to the Shortest Note Eligible for Delivery
Figure 6.9
Replicated Options Basket and Resulting Error of Combined Portfolio
Figure 7.1
History of Delphi Note Prices
Figure 7.2
10-Year Treasury Note Prices Are Relatively Close to One Another
Figure 7.3
Delphi Note Prices End Up at the Same Place, but Begin with Prices That Are Points Apart from Each Other
Figure 7.4
Delphi Note Price/Yield Leading Up to the Default
Figure 7.5
Delphi 29 Note Compared to Delphi 06 Note
Figure 8.1
Agency Yields Campared to Treasuries and Interest Rate Swaps
Figure 8.2
Moody’s Disturbution of Recovery Rates for Straight Bond Issues, 1982-2001
Figure 8.3
FHLB Debt Volatility Compared to Fannie Mae and Freddie Mac
Figure 10.1
Unusual Times for the ABX Index
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