What is a Credit Event ?

813530What’s a credit event? It’s a difficult question. Dealbreaker is exercised on this, or more specifically on the issues with CDS protection holders getting paid on some unusual credit-event-like happenings:

  • There are bonds.
  • You buy CDS that is supposed to pay off if something goes wrong with the bonds.
  • Something goes wrong with the bonds, insofar as they poof into some weird garbage-y thing or assortment of garbage-y things.
  • You can scoop up garbage-y things to your heart’s content, but the contract doesn’t let you deliver them into CDS in a way that achieves the sensible result.
  • Sensible Result = Face Value of Bond minus Value of Package of Garbage-y Things You Got For Your Bond
  • So you get less than Sensible Result, and are screwed, and the CDS seller has a windfall.  Continue reading “What is a Credit Event ?”

Theory of Asset Pricing

All valuation classes teach the equity market correlation method so it would be interesting to hear your views.images

Equity exists in many forms. In securitization, equity is the tranche that takes the first loss and controls the deal. In a mutual insurer/bank/thrift, etc., the book equity is held by the dividend-receiving policyholders. The real equity is held by management, who actually control the place, because the dividend-receiving policyholders will not vote them out. In a credit tenant lease, there is the guy that owns the property, and typically he puts up a teensy amount of equity, because there is a “credit tenant,” one that has an investment grade rating, and the mortgage is secured by: Continue reading “Theory of Asset Pricing”


Corporate bond market and  equity market is interlinked , for when there is a bad news about the company the share prices goes down and the corporate bond prices goes down. The corporate bond market is also deeply linked to the government bonds market if the interest rate goes up bond prices of both the market goes down. Currency spot and derivative market of the world are also connected with the India bond market.

In India it’s been treated differently and had failed. In order to achieve progress critical requirement is to make perspective of the Bond Continue reading “BOND CURRENCY DERIVATIVES: (Back to School)”

How to brighten dark side of negotiated dealing system (Back to School)

THE negotiated dealing system (NDS) for government securities does not have customers but hostages. It uses a monopoly on gilt clearing and settlement to deny competitors like NSE straight-through-processing. Competing bilateral electronic platforms have not been allowed. Its deals are exempt from stamp duty. It has a waiver for the 5% volume cap for voice intermediaries. Banks received a not-so-subtle regulatory nudge for usage. Most importantly, the NDS uses the clearing and settlement toll gate (a monopoly that gives it a 55% net margin) to cross subsidise Continue reading “How to brighten dark side of negotiated dealing system (Back to School)”

Credit Derivatives

Worldly wisdom teaches that it is better for reputation to fail conventionally that to succeed unconventionally”

Life is either a daring adventure or nothing. Security does not exist in nature, nor do the children of men as a whole experience it. Avoiding danger is no safer in the long run than exposure.

I can calculate the motions of the heavenly bodies, but not the madness of Continue reading “Credit Derivatives”