Fed Credit Market Symposium
Re: the surprise on May 4th, 2005 when GM went up +18%,
causing a Naybob predicted convergence of GM & GMAC issues that caught many making a wrong way bet.
From the 2007 Credit Markets Symposium, Fed Gov Kroszner speaks: Full Speech
The notional amount of credit derivatives outstanding has doubled each year for the past five years; it totaled $20 trillion at the end of June 2006, according to statistics compiled by the Bank for International Settlements (BIS).
Single-name CDS make up 70 percent of all credit derivatives, multiname CDS make up the remaining 30 percent of credit derivatives, according to the BIS.
Another instrument in the credit markets, similar to a credit index tranche, is the collateralized debt obligation, or CDO.
The most common types of collateral for CDOs are asset-backed and corporate securities and syndicated loans. CDOs backed by loans are referred to as collateralized loan obligations, or CLOs.
The institutional investors in these loans include mutual funds, insurance companies, pension funds, and hedge funds.... little is known about the holdings of the various types of institutions.
...while much is being made of the increasingly important role of hedge funds in credit markets, hedge funds, in turn, are increasingly managing assets on behalf of endowments, pension funds, and other institutional investors.
For investment-grade corporate bonds--the bid-ask spread averaged 64 basis points last year. For single-name investment-grade CDS, only 10 basis points or less, and for investment-grade credit indexes just 2 basis points.
...many focus on the dangers of risk transfer to highly leveraged entities that might be vulnerable to a sharp widening of credit spreads...
...the most important risk-management challenge in credit markets is the management of counterparty credit risk.
given the growing role of hedge funds in credit markets, it is appropriate to ask whether dealer banks have enough collateral to protect them against a stress scenario that goes well beyond the recent benign experience in credit markets.
The value of credit index tranches and CDO tranches is sensitive not only to the number of defaults among a set of issuers but also to the correlation of defaults.
The mathematical relationship between tranche value and correlation depends on the particular model that is used to forecast defaults. This dependency exposes dealers and investors to so-called correlation risk if their models or forecasts of default correlation turn out to be incorrect.
In May 2005, a widening of credit spreads for several automotive companies led to sharp movements in the prices of credit index tranches that seemed to catch market participants by surprise.
causing a Naybob predicted convergence of GM & GMAC issues that caught many making a wrong way bet.
From the 2007 Credit Markets Symposium, Fed Gov Kroszner speaks: Full Speech
The notional amount of credit derivatives outstanding has doubled each year for the past five years; it totaled $20 trillion at the end of June 2006, according to statistics compiled by the Bank for International Settlements (BIS).
Single-name CDS make up 70 percent of all credit derivatives, multiname CDS make up the remaining 30 percent of credit derivatives, according to the BIS.
Another instrument in the credit markets, similar to a credit index tranche, is the collateralized debt obligation, or CDO.
The most common types of collateral for CDOs are asset-backed and corporate securities and syndicated loans. CDOs backed by loans are referred to as collateralized loan obligations, or CLOs.
The institutional investors in these loans include mutual funds, insurance companies, pension funds, and hedge funds.... little is known about the holdings of the various types of institutions.
...while much is being made of the increasingly important role of hedge funds in credit markets, hedge funds, in turn, are increasingly managing assets on behalf of endowments, pension funds, and other institutional investors.
For investment-grade corporate bonds--the bid-ask spread averaged 64 basis points last year. For single-name investment-grade CDS, only 10 basis points or less, and for investment-grade credit indexes just 2 basis points.
...many focus on the dangers of risk transfer to highly leveraged entities that might be vulnerable to a sharp widening of credit spreads...
...the most important risk-management challenge in credit markets is the management of counterparty credit risk.
given the growing role of hedge funds in credit markets, it is appropriate to ask whether dealer banks have enough collateral to protect them against a stress scenario that goes well beyond the recent benign experience in credit markets.
The value of credit index tranches and CDO tranches is sensitive not only to the number of defaults among a set of issuers but also to the correlation of defaults.
The mathematical relationship between tranche value and correlation depends on the particular model that is used to forecast defaults. This dependency exposes dealers and investors to so-called correlation risk if their models or forecasts of default correlation turn out to be incorrect.
In May 2005, a widening of credit spreads for several automotive companies led to sharp movements in the prices of credit index tranches that seemed to catch market participants by surprise.
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