By Rohan Douglas
Within the decade because the credits derivatives industry began, monetary pros became more and more refined. such a lot books at the topic haven't saved velocity. Credit by-product Strategies closes the distance with cutting-edge options for choosing credits hedge money, interpreting occasion threat, deciding upon relative price possibilities and coping with CDOs.
The credits concern has many folks within the monetary rethinking the best way to deal with their credits hazard and publicity. it truly is now extra vital than ever for contributors within the monetary markets -- whether or not they are buying and selling or no longer -- to appreciate those credits items given their expanding impact.
The members to this publication are working towards pros who honed their craft at the various industry's such a lot winning businesses together with: Merrill Lynch, credits Suisse First Boston, Kenmar international funding administration, and Citigroup.
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Additional info for Credit derivative strategies : new thinking on managing risk and return
Credit structure trades have an average holding period of three months. Strategy 8: Capital Structure Trades The objective of this strategy is to generate positive returns by identifying and exploiting debt to equity relative value trades. This category also in cludes various permutations of capital arbitrage structures, especially ﬁnd ing debt equity trades within a company. Important triggers are shifts from bondholder value to shareholder val ue and vice versa. An example of the ﬁrst scenario is ISS.
50 Four Synthetic CDO Trading Strategies 49 one arrives at the same point (because convexity does not manifest strongly at 1 bp). Hedging using the index is popular because of ease efﬁciency of execution. Periodic single-name hedging can be undertaken as an overlay on top of the index hedging if one desires to maintain a small CS01 exposure per name. ” The market risk of a CDO strategy can be con trolled by the propensity of spreads to not move together and, therefore, the broad brush coherent moves based on either sector or ratings is mis leading.
Other concerns were currency exchange rates, which were quite volatile during the period. Consequently, the downgraded Asian debt was sold into a vacuum. Prices collapsed and the market became illiquid with a prepon derance of sellers and very few buyers. Prices fell to levels that looked very cheap based on the metric of EBITDA/interest coverage or debt to EBITDA. Gradually, more adventurous capital was attracted to the high poten tial returns of distressed Asian debt. These early investors were generally opportunistic distressed investors: hedge funds and proprietary desks of investment banks, which act like hedge funds.