Le Magazine du Trésorier - n°57 - 1er trimestre 2007 - (Page 18)
LA PAROLE AUX ANNONCEURS contracts negotiated with a swap dealer where the enduser would get paid in cash should the named credit default. The end user pays a fee, typically as a spread over LIBOR during the term of the agreement and the various legal definitions of what might constitute a default need to be considered. Typically it would be clear public default like declaration of Chapter 11 or Chapter 7, but it could be tied to smaller actions of default like defaulting on interest payments of one bond or loan. Typically CDS buyers are hedging a particular issue in their investment portfolio and the cashflows and default triggers match perfectly so in the instance there is a default the CDS buyer receives the principal back via the CDS and delivers the defaulted bond to the CDS writer, who needs the paper to at least have a chance to stand in line to get paid back something through bankruptcy proceedings. The problem with using CDS for hedging swap exposure is that you do not have a specific issuance in hand, so it gets a bit messy buying a defaulted bond to deliver and also you won’t be able to match perfectly your actual derivative loss which won’t be known at the time of the CDS purchase as the MTM on your swap would be different by the time of default. Hedging the entire notional exposure to the bank counterparty would be an over-hedge. A better approach may be to enter in a Collateralized Swap Agreement where cash or securities are posted to cover potential losses. Just be aware that it’s typically bilateral where you could end up posting. Despite the headaches that IFRS 7 may impose, particularly with respect to credit risk, it’s a good time to revisit your approach to measuring and monitoring your market risk exposures. Le Magazine du Trésorier - N° 57
http://www.guardian-europe.com
Table des matières de la publication Le Magazine du Trésorier - n°57 - 1er trimestre 2007