8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

1/30

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

2/30

REUTERS 3000 XTRA

Credit Default Swap (CDS)

A credit default swap is a bilateral financial contract in which onecounterparty (the credit protection party) makes periodic payments toanother party in return for a promise of payment contingent on some agreedupon third party reference credit(s) defaulting in respect of some statedobservable credit event.

Default is the non-performance of an agreed obligation.

For example, the non-payment of interest or principal under a swapagreement by one of the parties to the swap would be regarded as default.

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

3/30

REUTERS 3000 XTRA

Credit Ratings

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

4/30

REUTERS 3000 XTRA

Anyone wants to have insurance in Bond Holdings?Credit Default Swaps

CDS is a bilateral contract that provides the buyer of the CDS insurance against the risk of default by a particular company.M arket for products in 2004

C r e d i t D e f a u ltS w a p s

9%

M a n a g e d

S ynthe t i c C D Os2 %

S ynthe t i c Ba lanceS hee t C LOs

8% C LNs

3%

Portfol io De faul tS w a p s

6%

To tal ReturnS w a p s

1%

Options

1%

M a n a g e d S y nt he t i c C D Os

S yn th e t ic Ba l a n c e S h e e tC LOsOptions

C LNs

Por t fo l io D efau l t Swap s

To tal Re turn S wa ps

C r e d i t D e f a u lt S wa p s

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

5/30

REUTERS 3000 XTRA

Who were the end users of CDS?

Asset Managers5%

Hedge Funds8%

Banks(Securitisation)

8%

Special

PurposeVehicles

5%

Reinsurance14%

Insurance9%

Banks47%

Corporates4%

InsuranceReinsurance

Special Purpose VehiclesBanks (Securitisation)Hedge Funds

Asset ManagersCorporatesBanks

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

6/30

REUTERS 3000 XTRA

Credit Default Swap spread (the premium)

T he Credit Default Spread is quoted in asis oints per annum.P aid Quarterly in arrears

1 yr

Trade

date

Buyer of CDS paysquarterly

Seller of CDS protectionreceives quarterly payments

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

7/30

REUTERS 3000 XTRA

Credit Default Swap spread (the premium)

F or example, a CDS on F ord M otor Credit is quoted at 0 bps per annum on anotional 0 million USD. T he protection buyer ill pay -

? A USD22.222,20360910080.0000,000,10 !vv

N otional amount x ( asis P oints x days / Day ase)= Quarterly payment

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

8/30

REUTERS 3000 XTRA

Credit default Swaps- Credit Events.

F or a Credit Default S ap payment to be made, a credit event on a reference entitysasset has to have happened. P ayment is contingent on the credit event.

W hat is a credit event ?

- ankruptcy- F ailure to pay

- estructuring

- epayment Acceleration on Default (cross default clauses)

- epudiation

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

9/30

REUTERS 3000 XTRA

Short-tour of the Fixed Income Information in 3000Xtra

What data in Reuters 3000 Xtra is relevant to CDS?

CDSINDEX

GFIINDEX

HSBC/CDS

TRACX (Morgan Stanley)

General

BONDS (F3)

Latest ratings with history and news to analyse credit risk , f or example RRS 0001 shows the ratings historyf rom fu ll range o f ratings agencies; AAA shows credit news alerts

(US composite. has all of the composite pages) ( ff the runs)

(Interest rate S W AP s)

< CU RV ES> ( F3 )

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

10/30

REUTERS 3000 XTRA

Customize your CDS Screen(CDS Data, Yield Curve, News)

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

11/30

REUTERS 3000 XTRA

Pricing Credit Default Swaps.

T here are t o approaches

V aluation by proxy.

M athematical approach.

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

12/30

REUTERS 3000 XTRA

Search Credit Default Swap Model from Getgoing

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

13/30

REUTERS 3000 XTRA

Credit Default Swap Model Hutchison CDS Price

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

14/30

REUTERS 3000 XTRA

Search CDS from Equity Reference Name

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

15/30

REUTERS 3000 XTRA

Search CDS from Equity Reference Name

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

16/30

REUTERS 3000 XTRA

Search CDS from Bond ID

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

17/30

REUTERS 3000 XTRA

Search CDS Prices from Major Contributors

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

18/30

REUTERS 3000 XTRA

Hutchison Credit Curve

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

19/30

REUTERS 3000 XTRA

Correlation : CDS & Share Prices ?

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

20/30

REUTERS 3000 XTRA

h ttp://s h owcase.session.rservices.com

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

21/30

REUTERS 3000 XTRA

Credit Default Swap

Use the Credit Default S ap model to locate a reference credit and analyse the spread history of thecredit. You can compare a reference credit to other reference credits in a peer group. You can alsocompare a reference credit to the underlying stock, or to a bond asset s ap spread. T he Credit DefaultS ap model presents the information ith the best company and credit default s ap (CDS) ne s in onedisplay .

FeaturesView intra-day updates of bid, offer, and dealt CDS spreads from GFI

View the GFI history of a CDS bid and ask spread

View intra-day updates of bid and offer CDS spreads from other contributors, such as HSBL and Credit Trade

View credit reference spreads for over 1,800 entities held in the Reuters database from a number of contributors,including GFI*

Compare the performance of a CDS spread to the equity price over time in a graph

Compare a CDS spread against two others CDS spreads over time in a rebase graph

Compare the history of the CDS spread against the asset swap spread of the selected bond

Identify news stories linked to historic events in the history of a CDS and related equity

Find a specific reference entity from a bond or equity, or from a sector or regionView all the related issues of a reference credit

View all the details of the reference credit

View the best company and CDS news in one display

View the price and volatility information on the underlying stock

View asset swap and benchmark spreads for related bonds

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

22/30

REUTERS 3000 XTRA

CDS Analysis Model

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

23/30

REUTERS 3000 XTRA

CDS Analysis

CDS Analysis model allo s you to price a credit default s ap (CDS), and value an existing CDS.

Features

CDS Analysis model calculates:

CDS spread and premium

a default probability curve from the CDS spreads

a CDS spread curve from the contributed spreads using credit risk models

asset s ap spreads from the bonds closest to the CDS maturity

DV 01 for the CDS spread and the risk free zero curve

valuation of existing CDS

You can:

compare CDS spreads against asset s ap spreads

price using the Cox, Ingersoll, and R oss model or a credit event probability curve

calibrate the credit risk models from CDS spreads or a risky curvedefine a risky curve from interest rate s ap prices or related straight bonds

use your o n zero curve for the risk free curve

vie the data in a chart

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

24/30

REUTERS 3000 XTRA

Issuer Model

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

25/30

REUTERS 3000 XTRA

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

26/30

REUTERS 3000 XTRA

Features and benefits

Using the Issuer orksheet you can:Display information on a selected issuer of stocks and/or bonds.V ie information on the sector in hich the company is active.V ie a summary of the latest company report.V ie stock/bond listings and Issuer level ratings

M ove to a related orksheet giving further information on a selected stock or bond.T he Issuer orksheet provides information about an issuer of stocks and/or bonds,including the sector in hich the company is active, selected facts from the latestcompany report, company ne s, listings ith all issued stocks and bonds, and issuer-level rating, here available.

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

27/30

REUTERS 3000 XTRA

Bond Credit Model

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

28/30

REUTERS 3000 XTRA

Features and benefits

T he ond Credit orksheet provides the full picture on the credit risk of a bond or anissuer through the integrated display of relevant ne s, real-time and additional researchdata. Credit information as ell as actions and assignment notices from specific ratingagencies is available at the issue and issuer levels. T he orksheet also gives anovervie of an issuer's credit history.

With this worksheet you can :O btain an overvie of credit ne s and current and historic rating information on anissuer and issue level.V ie all live bonds from the same issuer.O btain rating actions and credit assignment notices from specific rating agencies suchas S& P Credit ire.O btain credit spreads contributed by J P M organ.

The Bond Credit worksheet gives you :T he full picture on the credit risk of a bond or an issuer through the integrated display of relevant ne s, real time, historic and additional research data.

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

29/30

REUTERS 3000 XTRA

Power Plus Pro - FI

Building Fixed Income spreadsheet and data downloading (Adfin Functions)

8/6/2019 Class 7 -Fixed Income Workshop II- CDS Market

30/30

REUTERS 3000 XTRA

Q & A

DAVID_HKU@YAHOO.COM