Tuesday, March 31, 2009
Big Bang Theory: Fixing Annuity Risk by Recouponing CDS
Pop-quiz! In which market can you actually lose money by being too right? Well, credit derivatives, where else? Read on for an explanation.
One of the recent Big Bang changes in the CDS market has been the recouponing of CDS to 100bp or 500bp. This change achieves two things: enhances fungibility and liquidity for clients and solves the vexing risky annuity issue that has brought much pain to dealers throughout the years.
To illustrate the basic motivation for the recouponing change consider a reference entity that has one bond outstanding and no loans. Trading the credit of this company is pretty easy: you’ve got a single security with a fixed coupon and an observable market price...
Seeking Alpha: Big Bang Theory: Fixing Annuity Risk by Recouponing CDS
One of the recent Big Bang changes in the CDS market has been the recouponing of CDS to 100bp or 500bp. This change achieves two things: enhances fungibility and liquidity for clients and solves the vexing risky annuity issue that has brought much pain to dealers throughout the years.
To illustrate the basic motivation for the recouponing change consider a reference entity that has one bond outstanding and no loans. Trading the credit of this company is pretty easy: you’ve got a single security with a fixed coupon and an observable market price...
Seeking Alpha: Big Bang Theory: Fixing Annuity Risk by Recouponing CDS
Permalink posted by markw @ 3:33 AM 
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