By Moorad Choudhry
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Extra info for An Introduction to Credit Derivatives
To see what the spread for this bond would be in an asset swap, we call up screen ASW. 7 basis points. 85 as before. 8. We see that the interpolated spread over US Treasuries is 69 basis points. 6: Bloomberg page YA for British Telecom 7% 2007 bond, as at 11 June 2003. P. Reproduced with permission. 7: Bloomberg page ASW for British Telecom 7% 2007 bond, as at 11 June 2003. P. Reproduced with permission. 8: Determination of British Telecom 7% 2007 bond yield spreads, using Bloomberg screen YAS, as at 11 June 2003.
On occurrence of a credit event, the swap contract is terminated and a settlement payment made by the protection seller or guarantor to the protection buyer. This termination value is calculated at the time of the credit event, and the exact procedure that is followed to calculate the termination value will depend on the settlement terms specified in the contract. This will be either cash settlement or physical settlement. We look at these options later. 2 shows investment-grade credit default swap levels during 2001 and 2002 for US dollar and euro reference entities (average levels taken).
The spread over Libor therefore represents additional credit risk over and above that of bank risk. Asset swaps are used to transform the cash flow characteristics of a bond, either fixedrate into floating-rate, or floating-rate into fixed-rate. This enables investors to hedge the currency, credit and interest-rate risks to create investments with more suitable cash flow characteristics for themselves. An asset swap package involves transactions in which the investor acquires a bond position and then enters into an interest-rate swap with the bank that sold the bond.
An Introduction to Credit Derivatives by Moorad Choudhry