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CDS Delivery Option: Better Pricing of Credit Default Swaps by David Boberski

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10
The ABX Meltdown
On March 26, 2008, Bear Stearns notified its stockholders in writing of the immediate sale of almost 40 percent of the company’s stock to JPMorgan. The eighty-five-year-old firm had been faced with a stark choice: either declare bankruptcy or sell to a rival at $2 per share. Just a year earlier, Bear Stearns’s stock had reached an all-time high of $170. Credit derivatives traders can learn much from the downfall of Bear Stearns, the first collapse of a major broker since the disintegration of Drexel Burnham Lambert in 1990, particularly concerning important differences between over-the-counter and listed derivatives markets, and what happens to credit default prices when there is a near bankruptcy but not an actual filing. ...

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