1 Bond Insurance Guarantees bond principal in case of a credit event. Effectively “swaps” the rating of the bond for that of the insurer. Purchased by.

Slides:

Advertisements

Similar presentations

Introduction To Credit Derivatives Stephen P. D Arcy and Xinyan Zhao.

Advertisements

Credit Default Swaps – By Prof. Simply Simple A Credit Default Swap (CDS) is a contract in which a buyer pays a payment to a seller to take on the credit.

Credit Default Swaps Can someone explain to Brian Williams what a CDS is? An insurance policy taken out by a buyer of a bond against the risk of default.

Credit Derivatives.

Orion Karl Daley August – 2009

Ch26, 28 & 29 Interest Rate Futures, Swaps and CDS Interest-rate futures contracts Pricing Interest-rate futures Applications in Bond portfolio management.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Asset Classes and Financial Instruments CHAPTER 2.

Unit 5 Microeconomics: Money and Finance Chapters 11.2 Economics Mr. Biggs.

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Introduction to Fixed Income Securities Fixed Income Securities MB 77.

Chapter 10 Bond Prices and Yields. U.S. Credit Market Instruments O/S 2008 Q3 By Selected Major Borrowers (Not Exhaustive List) Corporate & Foreign Bonds.

Derivative Markets. Agenda An Introduction to Derivatives Types of Derivatives Call Options Put Options Options Resources.

©2009, The McGraw-Hill Companies, All Rights Reserved 8-1 McGraw-Hill/Irwin Chapter Ten Derivative Securities Markets.

The Subprime Mortgage Crisis

© 2008 Pearson Education Canada13.1 Chapter 13 Hedging with Financial Derivatives.

Risk Management in Financial Institutions (II) 1 Risk Management in Financial Institutions (II): Hedging with Financial Derivatives Forwards Futures Options.

17-Swaps and Credit Derivatives

Derivatives Markets The 600 Trillion Dollar Market.

REUTERS 3000 XTRA University of Hong Kong Trading Workshop David Lo Class 7 Fixed Income Workshop II Credit Default Swap Markets.

Swaps Copyright 2014 Diane Scott Docking 1. Learning Objectives Describe an interest rate swap Understand swap terminology Be able to set up a simple.

Credit Derivatives Chapter 21.

Exotic Investments Lesson 2 Interest Rate and Credit Default Swaps BONUS.

Chapter 5 Money market Dr. Lakshmi Kalyanaraman 1.

Financial Collapse Destruction of Wealth Collapse of Banks Falling Housing Prices Freezing Credit Markets Attributable to Credit Default Swaps?

1 Bond Price, Yields, and Returns Different Bond Types Bond Price Bond Yield Bond Returns Bond Risk Structure.

Options, Futures, and Other Derivatives 6 th Edition, Copyright © John C. Hull Credit Derivatives Chapter 21.

Financial Instruments

INVESTMENTS | BODIE, KANE, MARCUS Chapter Fourteen Bond Prices and Yields Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction.

© 2008 Pearson Education Canada13.1 Chapter 13 Hedging with Financial Derivatives.

Uses of Derivatives for Risk Management Charles Smithson Copyright 2004 Rutter Associates, LLC Assessing, Managing and Supervising Financial Risk The World.

Introduction to Credit Risk

Mortgage Credit Events & Floating Rate Payment Events Document Usage restricted to ISDA/FpML Working Group 10 July 2007.

7 May 2001 International Swaps and Derivatives Association Mexico City Derivatives and Risk Management in Mexico Interest Rate and Currency Derivatives.

Chapter 10 Bond Prices and Yields Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.

Sub-Prime Crisis Dr. Green. False Prosperity of the Credit Economy Low interest rates – Car loans—no money down or low interest – Credit card loans—0%

Paola Lucantoni Financial Market Law and Regulation.

Derivatives. What is Derivatives? Derivatives are financial instruments that derive their value from the underlying assets(assets it represents) Assets.

What We Learned from H-E-D-G-E. Introduction to Business Transactions November 27, 2007.

Chapter 14 Financial Derivatives. © 2013 Pearson Education, Inc. All rights reserved.14-2 Hedging Engage in a financial transaction that reduces or eliminates.

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 Derivatives: Futures, Options, and Swaps.

Collateralized Debt Obligations Fabozzi -- Chapter 15.

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. Chapter 14 Financial Derivatives.

1 MGT 821/ECON 873 Financial Derivatives Lecture 1 Introduction.

Credit Derivatives Chapter 29. Credit Derivatives credit risk in non-Treasury securities  developed derivative securities that provide protection against.

Financial Literacy FINAL VOCABULARY By: Zack Clary.

Deutsche Bank Deutsche Bank National Trust Company Product Overview - VRDO 2009.

1 Banking Industry Number of banks ~7,000 decreasing (result of consolidation, deregulation and failures) Number of branches ~90,000 (result of relaxed.

1 Bond Insurance Guarantees bond principal in case of a credit event. Effectively “swaps” the rating of the bond for that of the insurer. Purchased by.

Economics 434 Financial Markets Professor Burton University of Virginia Fall 2015 November 5, 2015.

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 2 Asset Classes and Financial Instruments.

Chapter 15: Financial Risk Management: Concepts, Practice, & Benefits

Investment Definitions. Class Objective Students will gain a knowledge of financial terms and relate them to what was going on in the 1920’s. Students.

Financial Risk Management of Insurance Enterprises Forward Contracts.

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Ten Derivative Securities Markets.

A Rating Agency Perspective Marc Daly Nik Khakee.

Introduction of Credit Default Swaps R N Kar Reserve Bank of India.

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.1 CHAPTER 32 Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Chapter 9 Derivatives: Futures, Options, and Swaps.

Laura Shalayeva IES  What does “credit derivative” mean?  Credit events  Market size  Types of credit derivatives  Credit default swap.

Insurance Securitization Impetus Insurance Markets $ Billion in Capital Financial Markets $10-15 Trillion in Capital Catastrophe Potential $

Foreign Exchange Derivative Market  Foreign exchange derivative market is that market where such kind of financial instruments are traded which are used.

Central Bank of Egypt Financial Risk Management Financial Risk Management.

Chapter 27 Credit Risk.

Corporate Senior Instruments Markets: II

Interest rate swaps, currency swaps and credit default swaps

Credit Default Swaps – By Prof. Simply Simple

Banking Industry Number of banks ~7,000 decreasing (result of consolidation, deregulation and failures) Number of branches ~90,000 (result of relaxed geographical.

Bond Insurance Guarantees bond principal in case of a credit event.

Credit Default Swaps – By Prof. Simply Simple

Bond Insurance Guarantees bond principal in case of a credit event.

Presentation transcript:

1 Bond Insurance Guarantees bond principal in case of a credit event. Effectively “swaps” the rating of the bond for that of the insurer. Purchased by 1.bond issuers at time of issue to help sell bond (often done with munis). 2.bond holders interested in protecting themselves from bond default. 3.bond holders interested in upgrading the quality of the bonds they have on their books. Financial soundness of the insurance only as good as the insurance company.

2 Credit Default Swaps (CDS) CDS typically quoted in terms of $10 million for 5 years. Ex: Price to insure $10 million of XYZ bonds for 5 years is 150 basis points per annum. But like free money if no credit event. Many CDS buyers didn’t own reference obligation. More like a bet than insurance. Several things went wrong: Since don’t have to own reference obligation, notional amount of outstanding CDSs can exceed reference obligation’s total face value. CDS coverage grew rapidly on mortgage-backed securities. Made them look, whatever their quality, good on the books of financial institutions. When reference obligations went bad in large numbers, CDS writers (like AIG) unable to pay. As a result of Commodity Futures Modernization Act, there were no regulations about having to put any money aside.

3 Credit Event bankruptcy default failure to pay repudiation/moratorium restructuring CDS writers have to pay when credit event occurs on reference obligation.

4 Things for Final Last third of course. 5 Cs 3 base rate adjustments What TIPS stands for 6 typical types of MM instruments Names of 3 ratings agencies Latest National Debt and Social Security Trust fund figures Know meaning of the word “notional” – principal or face value amount Know about Commodity Futures Modernization Act Questions end Dec 10 midnight.