Credit Default Swap Products and Evaluation 3
Brief Overview 3
Definition of a Credit Default Swap 3
Levered Loan CDS 5
Unwinding a CDS Transaction 5
Unwinding an Off-Market CDS 6
Points Upfront 7
Restructuring Language Differences 7
Cash Settlement for Single-Name CDS 9
Succession Rules 10
Index Products 11
Index Arbitrage 13
Corporate Bond LIBOR Pricing Methodologies 15
Adjusting Spreads on Premium-Priced Bonds 17
Basis Evaluation 18
Repo “Special” 19
Credit Suisse’s Approach to Basis Trading 21
Valuation of Step-Up Bonds 22
Steep CDS Curves Effect on Rolls 23
Steepeners and Flatteners 24
CDS Orphaning and Confusing Name Changes 25
Credit Default Swaptions and Instruments with Optionality 29
Credit Default Swaption Review 29
Cancelable CDS and Other Exotics 31
Implied vs. Historical 32
Where’s the Skew? 32
Options Embedded in Bonds 33
Constant-Maturity Credit Default Swaps 34
Introducing CDS Variance Swap 35
Recovery Trades. Digital CDS 37
Capital Structure Arbitrage 39
Debt vs. Equity. Potential to Win in the “Wings” 39
The Trickiest Thing in Cap Arb: Hedging 40
Other Capital Arbitrage Flows to Watch 43
Trading Implied Equity vs. Implied CDS Volatility 46
Structured Products: Baskets and Index Tranches 47
Review of Nth to Default 47
Tranched DJ CDX Products 49
Path Dependency and Tranche Carry 50
Constant Proportional Debt Obligations (CPDOs) 52