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10 votes

Why would Basel III prevent price discovery at credit markets?

The argument about Basel is an adjunct to the central bank argument. There, a relatively price-insenstive CB either distorts credit by buying it directly (ECB, Fed wrt Agencies). Or distorts it ...
demully's user avatar
  • 5,071
9 votes
Accepted

Is repo-ing out a bond the same as shorting the bond?

Repoing out a bond is not shorting the bond. Repoing out is essentially collateralized borrowing. One is selling the bond and agreeing to buy the bond back at an agreed upon price. The difference ...
AlRacoon's user avatar
  • 6,632
7 votes

What's the difference between credit risk and counterparty credit risk?

Both 'credit risk' and 'counterparty credit risk' refer to the same type of risk, i.e. the risk that the opposite side of a contract will not honor its obligations to repay. But 'credit risk' will be ...
cykor21's user avatar
  • 261
6 votes
Accepted

Relationship between BBB credit spreads and rising interest rates

One explanation might be purely quantitative: The spread is to compensate for the present value (cost) of a possible future default. When interest rates rise all else equal, the discounted cost of ...
Mats Lind's user avatar
  • 1,412
5 votes
Accepted

Markit recovery rates : assumed vs real

This is indeed a markit vocabulary that spread worldwide. Both recoveries are indeed "often" equal, but there is nevertheless a huge difference between them : one is a pure quotation tool whereas the ...
Olórin's user avatar
  • 1,223
5 votes
Accepted

"Where is my money": CDS Sensitivities, Spreads and PnL Calculations

You would need to provide more details for an accurate PnL attribution. However, here are some additional points to consider that might help. When you sold protection, you effectively became long ...
AlRacoon's user avatar
  • 6,632
5 votes

systematic trading reading fixed income

AQR Capital Management has a number of good papers on the general topic of systematic investing. In particular, you might find "Systematic Credit Investing" by Frieda and Richardson (easy to ...
Sharad's user avatar
  • 1,211
4 votes
Accepted

Is a CDS spread a spread in a typical sense

Regarding the terminology, there is no relation between CDS spread and bid/ask spread. The term spread in this sense refers to the related difference (spread) of the effective (credit risky) interest ...
CFW's user avatar
  • 206
4 votes
Accepted

Why do we swap the bond value and par value at the beginning in the Asset Swap

Rather than thinking of an asset swap as a traded instrument, it can be useful to think of the asset swap spread as a relative value indicator. The asset swap PV has two parts, the bond part (valued ...
Chris Taylor's user avatar
  • 5,931
4 votes

Accrual in Default Derivation of Credit CDS Curve

The accrual on default is like the accrued interest on a bond. A credit default swap can be looked as a synthetic bond. As such, with each passing day, interest is earned to the seller of protection ...
AlRacoon's user avatar
  • 6,632
4 votes

Intuitively, why does liquidity premium contribute to bond yield?

For clarity, I'll use two expressions, "liquidity premium" and "illiquidity premium": "Liquidity premium" arises when investors value the liquidity profile of an instrument so much that they are ...
Helin's user avatar
  • 11.8k
4 votes

Why would Basel III prevent price discovery at credit markets?

Assume, for a moment, that all of the math behind modern portfolio theory is incorrect. See, for example, this video on deriving the distribution of returns. Without the normality assumption, ...
Dave Harris's user avatar
  • 4,299
4 votes

Can I calculate the CVA or DVA over a sovereign portfolio?

CVA stands for Credit Valuation Adjustment and should be applied to derivatives and not bond portfolios. The reason is that unlike derivatives, a bond has the counterparty credit quality implicitly ...
David Duarte's user avatar
  • 5,835
4 votes

Comparing asset swap spreads

Let me add that in my experience, floating-rate bonds are less liquid than fixed coupon bonds, particularly in emerging markets and also particularly for corporates. As user42108 pointed out, it might ...
Jan Stuller's user avatar
  • 6,178
4 votes
Accepted

Corp Bond vs cds

Since you are looking to BUY a bond, can I assume your existing position that your are trying to hedge is a SHORT credit risk of an entity? Assuming you are SHORT the credit risk of an entity, I ...
AlRacoon's user avatar
  • 6,632
3 votes

CDS Indices Query

Every 6 months, there is a new series of an index (usually with slightly different names). The "on the run" series (maturing on IMM date 5 years from now) is the most liquid. "Off the run" series (...
Dimitri Vulis's user avatar
3 votes
Accepted

Accrual in Default Derivation of Credit CDS Curve

The formula for the accrual on default $$ S_n \sum_{i=1}^n \frac{\Delta_i}{2}(Ps(i-1)-Ps(i))DF_i $$ is just an approximation that says conditional on default occurring within period $i$ (probability ...
Antoine Conze's user avatar
3 votes
Accepted

Mark to Market of a CDS Contract and Risky Annuities

ok so if you sell a CDS for 100bp and then the market moves to 90bp, you have a profit of 10bp. But how much is that actually worth in dollar terms? Suppose you then buy the CDS for 90bp, what have ...
dm63's user avatar
  • 17.2k
3 votes

What's the difference between credit risk and counterparty credit risk?

This is my take on the matter: ** Credit risk ** - this can be defined as the risks of default on financial obligations from the extension of credit directly to a counterparty or indirectly ...
Joseph Lee's user avatar
3 votes

What's the difference between credit risk and counterparty credit risk?

I think the accepted answer gives the right insight, but I would like to add a further consideration: the difference between credit and counterparty risk is related to the main risk you are seeking ...
Daneel Olivaw's user avatar
3 votes

What is an appropriate hedge ratio for hedging a credit instrument with equity of the same issuer?

One way to approach this is to use a structural credit model which links the price of debt and equity. To start with, you may wish to consider the JP Morgan / Deutsche Bank Credit Grades model which ...
Dom's user avatar
  • 2,167
3 votes

Literature on credit risk premia

Two papers by AQR might be of use: Asvanunt, A. and S. Richardson (2016), “The Credit Risk Premium”: Despite theoretical and intuitive reasons for a credit risk premium, past research has found ...
AK88's user avatar
  • 1,850
3 votes

What's the difference between credit risk and counterparty credit risk?

There is no significant difference between the two. Both can be considered a financial risk, although credit risk appear to have a slightly broader view. You might also hear the term default risk used....
Peacock's user avatar
  • 196
3 votes
Accepted

Hedging Ratios for Fixed Income Instruments

Hedging with futures Calculate DV01 of your corporate bond Calculate DV01 of the cheapest to deliver of the future contact that is closest to the maturity of your bond Ratio between DV01 of Cheapest ...
Mike Kipnis's user avatar
3 votes
Accepted

Systematic credit "liquidity provider" strategy

I think I understand what Gould means, (but maybe I'm mistaken, in which case all errors are mine). A market participant is usually acting in one of two modes: A market market provides liquidity. He ...
Dimitri Vulis's user avatar
3 votes

Comparing asset swap spreads

"it depends on whether you can "monetize the spread"" Presumably means whether you can trade the spread and make (or lose) money by doing so. It's possible there are "limits ...
user42108's user avatar
  • 2,272
3 votes

Comparing asset swap spreads

Bond valuation is often assumed to be dependent solely on the 'credit spread'. But the primary driver of securities prices is supply and demand, and this can materialise in many different ways. Let me ...
Attack68's user avatar
  • 10.8k
3 votes

CDS spread changes with its recovery rate

Whether you want the different recoveries to keep the constant hazard rate (equivalently probability of default, probability of survival) or constant mark to market (upfront) depends on why you're ...
Dimitri Vulis's user avatar
3 votes

Replicating Bloomberg Barclays index and sub-index monthly total and excess returns using constituent-level index-data

The devil's in the details. Here are a few things to check off the top of my head: Index constituents: The index is rebalanced only once a month, at the end of each month. We'd switch to the the ...
Helin's user avatar
  • 11.8k

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