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KIC000110 - Hedging or Speculation The major source of...

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Unformatted text preview: Hedging or Speculation - The major source of controversy surrounding the CD5 market has to do with what It‘s used for. - As with interest rate swaps, they can be used for two main purposes: Hedging and Speculation. - rfyou are a portfolio manager and are holding corporate bonds, you may wanna hedge agalnst a possible credit event. - what are you left with ifthe market price ofrisl: is flair and you own the bond and buy a CBS? . What ifyou wantto take a bet on the company defaulting without actually buying or shorting the bonds? 0 Is it easy toshon corporate bonds? Credit Default Swaps Notional 1’ 0 Outstanding (billions) 1_/ N97. 1? il' - 1 ion Hedging ExGJnPlL fixflngwo o .1 CU: premium: 5% [nu-Harry twain premium .FlJ’men: . W national emu-nu! x rump rule (in decimal) x L50 " / actual number a! dug: in qulrrer D mbfi‘HqS 560 How it used to work El EXAMPLE. Axum: :hypallwtiral audit default swap where the national ml is 510 million Ind there :1:le actualdays in a quarter. Sauce the swap premium is 200 basispmnix (0.02). the quarteriymp pmmium paymmr made by the protection buyer is, quarterly swap premium payment - 92 $10,000,000 x 0.02 x ms SSIJUJI .- 03, up .A .; mm”: v. ...
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