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The Credit Default Swap Basis

Book Description

The growth of the credit derviatives market has produced a liquid market in credit default swaps across the credit curve, and this liquidity has led many investors to access both the credit derivative and cash bond markets to meet their investment requirements.

This book investigates the close relationship between the synthetic and cash markets in credit, which manifests itself in the credit default swap basis. Choudhry covers the factors that drive the basis, implications for market participants, the CDS index basis, and trading the basis.

Credit market investors and traders as well as anyone with an interest in the global debt markets will find this insightful and rewarding.

THIS BOOK QUALIFIES FOR 7 PD CREDITS UNDER THE GUIDELINES OF THE CFA INSTITUTE PROFESSIONAL DEVELOPMENT PROGRAM.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. Dedication
  5. Contents
  6. Expanded Contents
  7. Foreword
  8. PREFACE
  9. ABOUT THE AUTHOR
  10. Publication
  11. CHAPTER 1: A Primer on Credit Default Swaps
    1. Credit Risk and Credit Derivatives
    2. Credit Derivative Instruments
    3. Credit Default Swaps
    4. Asset Swaps
    5. The CDS iTraxx Index
    6. CDS Price Quotes
    7. Settlement
    8. CDS Valuation
  12. CHAPTFR 2: Bond Spreads and Relative Value
    1. Bond Spreads
    2. Z-Spread
  13. CHAPTER 3: The CDS Basis I: The Relationship Between Cash and Synthetic Credit Markets
    1. The Market Differential
    2. The Credit Default Swap Basis
    3. Factors Behind the Basis
    4. The Basis Smile
    5. The Dynamics of the Default Swap Basis
    6. The iTraxx Index Basis
    7. The Impact of the Basis on Trading Strategy
    8. Summary
  14. CHAPTER 4: Supply and Demand and the Credit Default Swap Basis
    1. Supply and Demand
    2. CDS Mechanics
    3. A Different Basis Measure
  15. CHAPTER 5: The CDS Basis II: Further Analysis of the Cash and Synthetic Credit Market Differential
    1. Basis and Relative Value
    2. Basis Spread Measures
    3. Analyzing the Basis
    4. Adjusted Basis Calculation
    5. Summary
  16. CHAPTER 6: Trading the CDS Basis: Illustrating Positive and Negative Basis Arbitrage Trades
    1. Relative Value and Trading the Basis
    2. Factors Influencing the Basis Package
    3. Trade Examples
    4. Conclusion
  17. APPENDIXES
    1. APPENDIX I: Description of Bloomberg Screen CDSW
    2. APPENDIX II: The Market Approach to CDS Pricing
      1. Default Probabilities
      2. Pricing a CDS Contract
      3. Example Calculation
    3. APPENDIX III: Market-Implied Timing of Default from CDS Prices
  18. GLOSSARY
  19. Index
  20. ABOUT BLOOMBERG
  21. A FRESH VIEW ON FIXED INCOME