https://creditderivs.com/api.php?action=feedcontributions&feedformat=atom&user=DrKazza 2026-09-22T18:02:07Z User contributions MediaWiki 1.41.1 https://creditderivs.com/index.php?title=Settlement&diff=45 2023-03-21T10:39:57Z

<p>DrKazza: Created page with &quot;Originally CDS was designed to be vaguely similar to an Insurance Contract so that when a Credit Event was determined the buyer of Protection would Physically Settle the contract, that would involve delivering some defaulted bonds or loans and in exchange they would receive the Notional Amount of the contract, so for example 10 million USD of bonds which may only be worth 3.5 million USD would be delivered and the seller of protectio...&quot;</p> <hr /> <div>Originally [[CDS]] was designed to be vaguely similar to an [[Not an Insurance Contract|Insurance Contract]] so that when a [[Credit Event]] was determined the buyer of Protection would Physically Settle the contract, that would involve delivering some defaulted bonds or loans and in exchange they would receive the Notional Amount of the contract, so for example 10 million USD of bonds which may only be worth 3.5 million USD would be delivered and the seller of protection would pay 10 million USD of cash.<br /> <br /> Note that the denomination of the bonds does not need to match the denomination of the contract, but it does need to be &quot;Standard Settlement Currency&quot; which usually means one of USD, GBP, EUR, JPY, AUD.<br /> <br /> <br /> At some point it was noted that more CDS was outstanding than existed bonds to be delivered which could potentially cause a [[wikipedia:Short_squeeze|Squeeze]] on the bonds and distort the market. That caused people to ask for a net cash settlement with the seller paying to the buyer the Notional Amount * (1 - Final Price) with the final price being calculated independently from the two parties to the contract.<br /> <br /> <br /> This cash settlement is now the far more common method of settlement of credit events into a CDS contract.</div>

DrKazza https://creditderivs.com/index.php?title=Recovery&diff=44 2023-03-21T10:22:25Z

<p>DrKazza: </p> <hr /> <div>The Recovery of a Credit Event is used in two main situations, Pricing and Settlement.<br /> <br /> == Recovery Assumption - Pricing ==<br /> When pricing Credit Derivatives it is almost impossible to escape the Recovery Assumption when building a pricing model.<br /> <br /> The discounting models will have a discount factor linked to the probability of survival, that is obviously one of the major unknowns in the market however given the price of a bond (or a credit derivative) one can work out the market price implied survival probability, however this cannot be done without making some kind of guess as to the price of an asset after a default has occurred.<br /> <br /> An example of how this relationship behaves can be illustrated as follows:<br /> <br /> Imaging a distressed zero coupon bond which is trading at a price of 80 and has a month to maturity - i.e. no cashflows are due other than the principal payment and there's little effect of the time value of money.<br /> <br /> If you assume that the recovery of this bond would be 0 then there's a long way for this bond to fall before it would default.<br /> <br /> * If the bond survives you would make 20 as it would redeem at par (100)<br /> * If the bond defaults you would lose 80<br /> <br /> Using a fair/efficient market assumption the probability of survival '''Ps''' satisfies this equation:<br /> 20 * '''Ps''' = 80 * (1 - '''Ps''')<br /> This would imply an 80% chance of survival (or 20% probability of default).<br /> <br /> <br /> Now let's say that actually the entity issuing this bond has a lot of assets that would be sold in a default and actually the bond wouldn't go to zero but would in fact trade more like 50, this is much closer to the current price and therefore the probability of survival is a lot lower:<br /> <br /> * If the bond survives you would make 20 as it would redeem at par (100)<br /> * If the bond defaults you would lose 30<br /> <br /> Using a fair/efficient market assumption the probability of survival '''Ps''' satisfies this equation:<br /> 20 * '''Ps''' = 30 * (1 - '''Ps''')<br /> Now this implies a 60% probability of survival (or 40% probability of default).<br /> <br /> <br /> <br /> The Recovery Assumption is used in pricing of credit derivatives and is only relevant '''before''' the [[Auction]] process has happened<br /> <br /> During the early years of CDS trading there was no market standard about what recovery should be used when calculating fees for unwinds (see [[Pricing]] page for more information), in fact some dealers would charge a bid/offer not only on the CDS itself but also a bid/offer on the recovery assumption when working out the final fee. This didn't go down well and it was agreed that for calculation of fees there would be market standard assumed recoveries and that only the bid offer on the CDS would be applied.<br /> <br /> These ISDA standard assumptions can be found at the [https://cdsmodel.com/fee-computations.html? CDS model page].<br /> <br /> == Final Price - post-Auction Recovery for Settlement ==<br /> Once a [[Credit Event]] has been officially determined an [[Auction]] Process begins, originally designed to be [[Settlement|Physical Settlement]], now [[CDS|Credit Default Swaps]] almost always trade with [[Settlement|Cash Settlement]]. That amount is calculated as the Notional of the trade multiplied by (100 - Final Price)%.<br /> <br /> Following the [[Big Bang and Small Bang|Big Bang]] protocol market participants agreed to a standardised Auction mechanism to determine the Final Price, buyers of protection still have the option to deliver bonds (or loans) into the contract or to sell into the auction, but for those who only want cash settlement the process is clean and transparent.</div>

DrKazza https://creditderivs.com/index.php?title=Recovery&diff=43 2023-03-16T17:05:31Z

<p>DrKazza: Created page with &quot;The Recovery of a Credit Event is used in two main situations, Pricing and Settlement. == Recovery Assumption - Pricing == When pricing Credit Derivatives it is almost impossible to escape the Recovery Assumption when building a pricing model. The discounting models will have a discount factor linked to the probability of survival, that is obviously one of the major unknowns in the market however given the price of a bond (or a credit derivative) one can work out the m...&quot;</p> <hr /> <div>The Recovery of a Credit Event is used in two main situations, Pricing and Settlement.<br /> <br /> == Recovery Assumption - Pricing ==<br /> When pricing Credit Derivatives it is almost impossible to escape the Recovery Assumption when building a pricing model.<br /> <br /> The discounting models will have a discount factor linked to the probability of survival, that is obviously one of the major unknowns in the market however given the price of a bond (or a credit derivative) one can work out the market price implied survival probability, however this cannot be done without making some kind of guess as to the price of an asset after a default has occurred.<br /> <br /> An example of how this relationship behaves can be illustrated as follows:<br /> <br /> Imaging a distressed zero coupon bond which is trading at a price of 80 and has a month to maturity - i.e. no cashflows are due other than the principal payment and there's little effect of the time value of money.<br /> <br /> If you assume that the recovery of this bond would be 0 then there's a long way for this bond to fall before it would default.<br /> <br /> * If the bond survives you would make 20 as it would redeem at par (100)<br /> * If the bond defaults you would lose 80<br /> <br /> Using a fair/efficient market assumption the probability of survival '''Ps''' satisfies this equation:<br /> 20 * '''Ps''' = 80 * (1 - '''Ps''')<br /> This would imply an 80% chance of survival (or 20% probability of default).<br /> <br /> <br /> Now let's say that actually the entity issuing this bond has a lot of assets that would be sold in a default and actually the bond wouldn't go to zero but would in fact trade more like 50, this is much closer to the current price and therefore the probability of survival is a lot lower:<br /> <br /> * If the bond survives you would make 20 as it would redeem at par (100)<br /> * If the bond defaults you would lose 30<br /> <br /> Using a fair/efficient market assumption the probability of survival '''Ps''' satisfies this equation:<br /> 20 * '''Ps''' = 30 * (1 - '''Ps''')<br /> Now this implies a 60% probability of survival (or 40% probability of default).<br /> <br /> <br /> The Recovery Assumption is used in pricing of credit derivatives and is only relevant before the [[Auction]] process has happened<br /> <br /> <br /> TO DO - ADD IN STUFF ABOUT AGREEMENT OF RECOVERY ASSUMPTIONS<br /> <br /> == Final Price - post-Auction Recovery for Settlement ==<br /> Once a [[Credit Event]] has been officially determined an [[Auction]] Process begins, originally designed to be [[Settlement|Physical Settlement]], now [[CDS|Credit Default Swaps]] almost always trade with [[Settlement|Cash Settlement]]. That amount is calculated as the Notional of the trade multiplied by (100 - Final Price)%<br /> <br /> <br /> TO DO - ADD IN BIG BANG STUFF</div>

DrKazza https://creditderivs.com/index.php?title=Credit_Event&diff=42 2023-03-16T16:34:41Z

<p>DrKazza: </p> <hr /> <div>A Credit Event is the thing that will trigger a change in cashflows on a Credit Derivative.<br /> <br /> There are typically 6 things that can trigger a Credit Event:<br /> <br /> * Bankruptcy<br /> * Obligation Acceleration<br /> * Obligation Default<br /> * Payment Default (Failure to Pay)<br /> * Repudiation/Moratorium<br /> * Restructuring<br /> <br /> These all have very specific terminology as defined by [https://www.isda.org/ ISDA]<br /> <br /> When someone believes that a Credit Event has occurred they will post a question to the [https://www.cdsdeterminationscommittees.org/ Credit Derivatives Determinations Committee] who will review the evidence and if a Credit Event has indeed occurred they will publish the results and also the exact date of this event which is called the Event Determination Date.<br /> <br /> After a Credit Event has been confirmed this will then start in place a timeline leading to the [[Auction]] process to determine the final [[Recovery]] price(s).<br /> <br /> <br /> Originally most contracts were drafted including all Credit Events, with Sovereigns trading with &quot;5CE&quot; - all of the above except Bankruptcy, slowly though the market realised that Repudiation was fairly specific to Sovereigns and Obligation Acceleration would be usually covered by Restructuring and Obligation Default would be covered by Failure to Pay, so only &quot;3CE&quot; were used for Corporates and Financials - Bankruptcy, Failure to Pay and Restructuring. See below for more information about Restructuring amendments.<br /> <br /> === Bankruptcy ===<br /> This is the catastrophic failure of a corporate (or financial) firm, this sort of Credit Event doesn't apply to Sovereigns/Countries since there's no concept of a Country going Bankrupt.<br /> <br /> This is also one quite a rare Credit Event, usually seen in Asia and Europe because in the US companies will more likely file for Bankruptcy Protection, also known as Chapter 11 and go through a restructuring, but it's not unheard of for a Bankruptcy event to happen.<br /> <br /> === Obligation Acceleration ===<br /> This is where a bond, for example, becomes due before it's normal maturity, for example your 30 year bond suddenly becomes a 2 year bond. There's a specific threshold amount that is required to be exceeded before this triggers and obviously any call or put provisions that are already in the bond's structure don't count.<br /> <br /> In a lot of cases, shortening a bond will result in a worse position for the investor - think of negative convexity in the mortgage bond market, but if a company has money to pay the amount outstanding it's unlikely to be a low Recovery event. This is one of the less common Credit Events.<br /> <br /> === Obligation Default ===<br /> Much like [[Obligation Acceleration]] there is a minimum threshold that must be exceeded but for this Credit Event to trigger a bond which is due to be paid is not paid and therefore is in Default.<br /> <br /> It is unlikely that an Obligation Default will not be accompanied by a [[Failure to Pay]] or in fact preceded by a Failure to Pay.<br /> <br /> === Failure to Pay ===<br /> The Failure to Pay Credit Event, also known as Payment Default, does pretty much what it says on the tin. It's where a payment is due under a contract and has not been paid. This contract could be the payment of coupons or principal on a bond, it could be on a bank loan or just any financial contract where payments are due. There are a couple of requirements, firstly there is a threshold amount, you couldn't trigger a Credit Event off the back of a $10 lunch reimbursement for example, and also there is a grace period whereby the company is given an amount of time to remedy the situation, to make sure that a Credit Event can't be triggered just because of a clerical error, or a Bank Holiday preventing settlement.<br /> <br /> === Repudiation Moratorium ===<br /> Repudiation and Moratorium are usually lumped together and are generally most applicable to Sovereign credits, this is a situation whereby the Government will just Repudiate the debt (&quot;Nah that doesn't belong to me, never seen it before, could be someone else's but it's definitely not mine... Have you tried lost and found?&quot;) or they declare a Debt Moratorium. (&quot;Yeah it's definitely mine but the cupboards are bare, you ain't getting anything, sorry&quot;)<br /> <br /> Along with Restructuring these are the most common Sovereign Credit Events.<br /> <br /> === Restructuring ===<br /> When companies start struggling but it's an orderly event (read: NOT LEHMAN) then there is usually time for either a Chapter 11 Bankruptcy protection or something similar in Europe and Asia, the end result is that the Debt gets restructured, maybe your 5 year bond becomes a 25 year bond. Maybe your claim for 100 USD becomes a claim for 20 USD or maybe someone jumps ahead of you in the seniority capital structure.<br /> <br /> The bottom line is that the bond you had is different to the one you used to have.<br /> <br /> Credit Derivatives have a number of different Restructuring clauses which can be used in different scenarios - initially we started with &quot;Full Restructuring&quot; ('''FR''') which was hoped to be all that the market needed.<br /> <br /> Unfortunately this didn't really capture some of the nuances of the US Investment Grade market and a modification was introduced back around 2001 and you had US names trading with &quot;Modified Restructuring&quot; ('''Mod-R''' or '''MR''')<br /> <br /> It was then noted that European and UK legislation didn't fit into the Mod-R landscape but also FR wasn't doing the job so &quot;Modified Modified Restructuring&quot; ('''Mod-Mod-R''', '''MMR''' or '''MM''') was introduced in 2003 and then implemented very broadly via the [[Big Bang and Small Bang|Small Bang]] Protocol in 2009.<br /> <br /> Finally the market worked out that even Mod-R didn't really work for the US High Yield market so most US High Yield names trade with &quot;No Restructuring&quot; ('''NR''') - this seemed to work best for these companies as they were less likely to be restructured anyway.<br /> <br /> The [https://www.bis.org/publ/qtrpdf/r_qt0503h.pdf BIS has a paper] in their Quarterly review of 2005 by Frank Packer and Haibin Zhu on this.</div>

DrKazza https://creditderivs.com/index.php?title=Credit_Event&diff=41 2023-03-16T16:28:56Z

<p>DrKazza: /* Bankruptcy */</p> <hr /> <div>A Credit Event is the thing that will trigger a change in cashflows on a Credit Derivative.<br /> <br /> There are typically 6 things that can trigger a Credit Event:<br /> <br /> * Bankruptcy<br /> * Obligation Acceleration<br /> * Obligation Default<br /> * Payment Default (Failure to Pay)<br /> * Repudiation/Moratorium<br /> * Restructuring<br /> <br /> These all have very specific terminology as defined by [https://www.isda.org/ ISDA]<br /> <br /> When someone believes that a Credit Event has occurred they will post a question to the [https://www.cdsdeterminationscommittees.org/ Credit Derivatives Determinations Committee] who will review the evidence and if a Credit Event has indeed occurred they will publish the results and also the exact date of this event which is called the Event Determination Date.<br /> <br /> After a Credit Event has been confirmed this will then start in place a timeline leading to the [[Auction]] process to determine the final [[Recovery]] price(s).<br /> <br /> == Bankruptcy ==<br /> This is the catastrophic failure of a corporate (or financial) firm, this sort of Credit Event doesn't apply to Sovereigns/Countries since there's no concept of a Country going Bankrupt.<br /> <br /> This is also one quite a rare Credit Event, usually seen in Asia and Europe because in the US companies will more likely file for Bankruptcy Protection, also known as Chapter 11 and go through a restructuring, but it's not unheard of for a Bankruptcy event to happen.<br /> <br /> == Obligation Acceleration ==<br /> This is where a bond, for example, becomes due before it's normal maturity, for example your 30 year bond suddenly becomes a 2 year bond. There's a specific threshold amount that is required to be exceeded before this triggers and obviously any call or put provisions that are already in the bond's structure don't count.<br /> <br /> In a lot of cases, shortening a bond will result in a worse position for the investor - think of negative convexity in the mortgage bond market, but if a company has money to pay the amount outstanding it's unlikely to be a low Recovery event. This is one of the less common Credit Events.<br /> <br /> == Obligation Default ==<br /> Much like [[Obligation Acceleration]] there is a minimum threshold that must be exceeded but for this Credit Event to trigger a bond which is due to be paid is not paid and therefore is in Default.<br /> <br /> It is unlikely that an Obligation Default will not be accompanied by a [[Failure to Pay]] or in fact preceded by a Failure to Pay.<br /> <br /> == Failure to Pay ==<br /> The Failure to Pay Credit Event, also known as Payment Default, does pretty much what it says on the tin. It's where a payment is due under a contract and has not been paid. This contract could be the payment of coupons or principal on a bond, it could be on a bank loan or just any financial contract where payments are due. There are a couple of requirements, firstly there is a threshold amount, you couldn't trigger a Credit Event off the back of a $10 lunch reimbursement for example, and also there is a grace period whereby the company is given an amount of time to remedy the situation, to make sure that a Credit Event can't be triggered just because of a clerical error, or a Bank Holiday preventing settlement.<br /> <br /> == Repudiation Moratorium ==<br /> Repudiation and Moratorium are usually lumped together and are generally most applicable to Sovereign credits, this is a situation whereby the Government will just Repudiate the debt (&quot;Nah that doesn't belong to me, never seen it before, could be someone else's but it's definitely not mine... Have you tried lost and found?&quot;) or they declare a Debt Moratorium. (&quot;Yeah it's definitely mine but the cupboards are bare, you ain't getting anything, sorry&quot;)<br /> <br /> Along with Restructuring these are the most common Sovereign Credit Events.<br /> <br /> == Restructuring ==<br /> When companies start struggling but it's an orderly event (read: NOT LEHMAN) then there is usually time for either a Chapter 11 Bankruptcy protection or something similar in Europe and Asia, the end result is that the Debt gets restructured, maybe your 5 year bond becomes a 25 year bond. Maybe your claim for 100 USD becomes a claim for 20 USD or maybe someone jumps ahead of you in the seniority capital structure.<br /> <br /> The bottom line is that the bond you had is different to the one you used to have.<br /> <br /> Credit Derivatives have a number of different Restructuring clauses which can be used in different scenarios - initially we started with &quot;Full Restructuring&quot; ('''FR''') which was hoped to be all that the market needed.<br /> <br /> Unfortunately this didn't really capture some of the nuances of the US Investment Grade market and a modification was introduced back around 2001 and you had US names trading with &quot;Modified Restructuring&quot; ('''Mod-R''' or '''MR''')<br /> <br /> It was then noted that European and UK legislation didn't fit into the Mod-R landscape but also FR wasn't doing the job so &quot;Modified Modified Restructuring&quot; ('''Mod-Mod-R''', '''MMR''' or '''MM''') was introduced in 2003 and then implemented very broadly via the [[Big Bang and Small Bang|Small Bang]] Protocol in 2009.<br /> <br /> Finally the market worked out that even Mod-R didn't really work for the US High Yield market so most US High Yield names trade with &quot;No Restructuring&quot; ('''NR''') - this seemed to work best for these companies as they were less likely to be restructured anyway.<br /> <br /> The [https://www.bis.org/publ/qtrpdf/r_qt0503h.pdf BIS has a paper] in their Quarterly review of 2005 by Frank Packer and Haibin Zhu on this.</div>

DrKazza https://creditderivs.com/index.php?title=Credit_Event&diff=40 2023-03-16T16:28:33Z

<p>DrKazza: /* Moratorium */</p> <hr /> <div>A Credit Event is the thing that will trigger a change in cashflows on a Credit Derivative.<br /> <br /> There are typically 6 things that can trigger a Credit Event:<br /> <br /> * Bankruptcy<br /> * Obligation Acceleration<br /> * Obligation Default<br /> * Payment Default (Failure to Pay)<br /> * Repudiation/Moratorium<br /> * Restructuring<br /> <br /> These all have very specific terminology as defined by [https://www.isda.org/ ISDA]<br /> <br /> When someone believes that a Credit Event has occurred they will post a question to the [https://www.cdsdeterminationscommittees.org/ Credit Derivatives Determinations Committee] who will review the evidence and if a Credit Event has indeed occurred they will publish the results and also the exact date of this event which is called the Event Determination Date.<br /> <br /> After a Credit Event has been confirmed this will then start in place a timeline leading to the [[Auction]] process to determine the final [[Recovery]] price(s).<br /> <br /> == [[Bankruptcy]] ==<br /> This is the catastrophic failure of a corporate (or financial) firm, this sort of Credit Event doesn't apply to Sovereigns/Countries since there's no concept of a Country going Bankrupt.<br /> <br /> This is also one quite a rare Credit Event, usually seen in Asia and Europe because in the US companies will more likely file for Bankruptcy Protection, also known as Chapter 11 and go through a restructuring, but it's not unheard of for a Bankruptcy event to happen.<br /> <br /> == [[Obligation Acceleration]] ==<br /> This is where a bond, for example, becomes due before it's normal maturity, for example your 30 year bond suddenly becomes a 2 year bond. There's a specific threshold amount that is required to be exceeded before this triggers and obviously any call or put provisions that are already in the bond's structure don't count.<br /> <br /> In a lot of cases, shortening a bond will result in a worse position for the investor - think of negative convexity in the mortgage bond market, but if a company has money to pay the amount outstanding it's unlikely to be a low Recovery event. This is one of the less common Credit Events.<br /> <br /> == [[Obligation Default]] ==<br /> Much like [[Obligation Acceleration]] there is a minimum threshold that must be exceeded but for this Credit Event to trigger a bond which is due to be paid is not paid and therefore is in Default.<br /> <br /> It is unlikely that an Obligation Default will not be accompanied by a [[Failure to Pay]] or in fact preceded by a Failure to Pay.<br /> <br /> == [[Failure to Pay]] ==<br /> The Failure to Pay Credit Event, also known as Payment Default, does pretty much what it says on the tin. It's where a payment is due under a contract and has not been paid. This contract could be the payment of coupons or principal on a bond, it could be on a bank loan or just any financial contract where payments are due. There are a couple of requirements, firstly there is a threshold amount, you couldn't trigger a Credit Event off the back of a $10 lunch reimbursement for example, and also there is a grace period whereby the company is given an amount of time to remedy the situation, to make sure that a Credit Event can't be triggered just because of a clerical error, or a Bank Holiday preventing settlement.<br /> <br /> == Repudiation [[Moratorium]] ==<br /> Repudiation and Moratorium are usually lumped together and are generally most applicable to Sovereign credits, this is a situation whereby the Government will just Repudiate the debt (&quot;Nah that doesn't belong to me, never seen it before, could be someone else's but it's definitely not mine... Have you tried lost and found?&quot;) or they declare a Debt Moratorium. (&quot;Yeah it's definitely mine but the cupboards are bare, you ain't getting anything, sorry&quot;)<br /> <br /> Along with Restructuring these are the most common Sovereign Credit Events.<br /> <br /> == Restructuring ==<br /> When companies start struggling but it's an orderly event (read: NOT LEHMAN) then there is usually time for either a Chapter 11 Bankruptcy protection or something similar in Europe and Asia, the end result is that the Debt gets restructured, maybe your 5 year bond becomes a 25 year bond. Maybe your claim for 100 USD becomes a claim for 20 USD or maybe someone jumps ahead of you in the seniority capital structure.<br /> <br /> The bottom line is that the bond you had is different to the one you used to have.<br /> <br /> Credit Derivatives have a number of different Restructuring clauses which can be used in different scenarios - initially we started with &quot;Full Restructuring&quot; ('''FR''') which was hoped to be all that the market needed.<br /> <br /> Unfortunately this didn't really capture some of the nuances of the US Investment Grade market and a modification was introduced back around 2001 and you had US names trading with &quot;Modified Restructuring&quot; ('''Mod-R''' or '''MR''')<br /> <br /> It was then noted that European and UK legislation didn't fit into the Mod-R landscape but also FR wasn't doing the job so &quot;Modified Modified Restructuring&quot; ('''Mod-Mod-R''', '''MMR''' or '''MM''') was introduced in 2003 and then implemented very broadly via the [[Big Bang and Small Bang|Small Bang]] Protocol in 2009.<br /> <br /> Finally the market worked out that even Mod-R didn't really work for the US High Yield market so most US High Yield names trade with &quot;No Restructuring&quot; ('''NR''') - this seemed to work best for these companies as they were less likely to be restructured anyway.<br /> <br /> The [https://www.bis.org/publ/qtrpdf/r_qt0503h.pdf BIS has a paper] in their Quarterly review of 2005 by Frank Packer and Haibin Zhu on this.</div>

DrKazza https://creditderivs.com/index.php?title=Credit_Event&diff=39 2023-03-16T16:28:10Z

<p>DrKazza: </p> <hr /> <div>A Credit Event is the thing that will trigger a change in cashflows on a Credit Derivative.<br /> <br /> There are typically 6 things that can trigger a Credit Event:<br /> <br /> * Bankruptcy<br /> * Obligation Acceleration<br /> * Obligation Default<br /> * Payment Default (Failure to Pay)<br /> * Repudiation/Moratorium<br /> * Restructuring<br /> <br /> These all have very specific terminology as defined by [https://www.isda.org/ ISDA]<br /> <br /> When someone believes that a Credit Event has occurred they will post a question to the [https://www.cdsdeterminationscommittees.org/ Credit Derivatives Determinations Committee] who will review the evidence and if a Credit Event has indeed occurred they will publish the results and also the exact date of this event which is called the Event Determination Date.<br /> <br /> After a Credit Event has been confirmed this will then start in place a timeline leading to the [[Auction]] process to determine the final [[Recovery]] price(s).<br /> <br /> == [[Bankruptcy]] ==<br /> This is the catastrophic failure of a corporate (or financial) firm, this sort of Credit Event doesn't apply to Sovereigns/Countries since there's no concept of a Country going Bankrupt.<br /> <br /> This is also one quite a rare Credit Event, usually seen in Asia and Europe because in the US companies will more likely file for Bankruptcy Protection, also known as Chapter 11 and go through a restructuring, but it's not unheard of for a Bankruptcy event to happen.<br /> <br /> == [[Obligation Acceleration]] ==<br /> This is where a bond, for example, becomes due before it's normal maturity, for example your 30 year bond suddenly becomes a 2 year bond. There's a specific threshold amount that is required to be exceeded before this triggers and obviously any call or put provisions that are already in the bond's structure don't count.<br /> <br /> In a lot of cases, shortening a bond will result in a worse position for the investor - think of negative convexity in the mortgage bond market, but if a company has money to pay the amount outstanding it's unlikely to be a low Recovery event. This is one of the less common Credit Events.<br /> <br /> == [[Obligation Default]] ==<br /> Much like [[Obligation Acceleration]] there is a minimum threshold that must be exceeded but for this Credit Event to trigger a bond which is due to be paid is not paid and therefore is in Default.<br /> <br /> It is unlikely that an Obligation Default will not be accompanied by a [[Failure to Pay]] or in fact preceded by a Failure to Pay.<br /> <br /> == [[Failure to Pay]] ==<br /> The Failure to Pay Credit Event, also known as Payment Default, does pretty much what it says on the tin. It's where a payment is due under a contract and has not been paid. This contract could be the payment of coupons or principal on a bond, it could be on a bank loan or just any financial contract where payments are due. There are a couple of requirements, firstly there is a threshold amount, you couldn't trigger a Credit Event off the back of a $10 lunch reimbursement for example, and also there is a grace period whereby the company is given an amount of time to remedy the situation, to make sure that a Credit Event can't be triggered just because of a clerical error, or a Bank Holiday preventing settlement.<br /> <br /> == [[Moratorium]] ==<br /> Repudiation and Moratorium are usually lumped together and are generally most applicable to Sovereign credits, this is a situation whereby the Government will just Repudiate the debt (&quot;Nah that doesn't belong to me, never seen it before, could be someone else's but it's definitely not mine... Have you tried lost and found?&quot;) or they declare a Debt Moratorium. (&quot;Yeah it's definitely mine but the cupboards are bare, you ain't getting anything, sorry&quot;)<br /> <br /> Along with Restructuring these are the most common Sovereign Credit Events.<br /> <br /> == Restructuring ==<br /> When companies start struggling but it's an orderly event (read: NOT LEHMAN) then there is usually time for either a Chapter 11 Bankruptcy protection or something similar in Europe and Asia, the end result is that the Debt gets restructured, maybe your 5 year bond becomes a 25 year bond. Maybe your claim for 100 USD becomes a claim for 20 USD or maybe someone jumps ahead of you in the seniority capital structure.<br /> <br /> The bottom line is that the bond you had is different to the one you used to have.<br /> <br /> Credit Derivatives have a number of different Restructuring clauses which can be used in different scenarios - initially we started with &quot;Full Restructuring&quot; ('''FR''') which was hoped to be all that the market needed.<br /> <br /> Unfortunately this didn't really capture some of the nuances of the US Investment Grade market and a modification was introduced back around 2001 and you had US names trading with &quot;Modified Restructuring&quot; ('''Mod-R''' or '''MR''')<br /> <br /> It was then noted that European and UK legislation didn't fit into the Mod-R landscape but also FR wasn't doing the job so &quot;Modified Modified Restructuring&quot; ('''Mod-Mod-R''', '''MMR''' or '''MM''') was introduced in 2003 and then implemented very broadly via the [[Big Bang and Small Bang|Small Bang]] Protocol in 2009.<br /> <br /> Finally the market worked out that even Mod-R didn't really work for the US High Yield market so most US High Yield names trade with &quot;No Restructuring&quot; ('''NR''') - this seemed to work best for these companies as they were less likely to be restructured anyway.<br /> <br /> The [https://www.bis.org/publ/qtrpdf/r_qt0503h.pdf BIS has a paper] in their Quarterly review of 2005 by Frank Packer and Haibin Zhu on this.</div>

DrKazza https://creditderivs.com/index.php?title=Credit_Event&diff=38 2023-03-16T16:26:44Z

<p>DrKazza: </p> <hr /> <div>A Credit Event is the thing that will trigger a change in cashflows on a Credit Derivative.<br /> <br /> There are typically 6 things that can trigger a Credit Event:<br /> <br /> * [[Credit Event#Bankruptcy|Bankruptcy]]<br /> * [[Credit Event#Obligation Acceleration|Obligation Acceleration]]<br /> * [[Credit Event#Obligation Default|Obligation Default]]<br /> * Payment Default ([[Failure to Pay]])<br /> * [[Credit Event#Moratorium|Repudiation/Moratorium]]<br /> * [[Credit Event#Restructuring|Restructuring]]<br /> <br /> These all have very specific terminology as defined by [https://www.isda.org/ ISDA]<br /> <br /> When someone believes that a Credit Event has occurred they will post a question to the [https://www.cdsdeterminationscommittees.org/ Credit Derivatives Determinations Committee] who will review the evidence and if a Credit Event has indeed occurred they will publish the results and also the exact date of this event which is called the Event Determination Date.<br /> <br /> After a Credit Event has been confirmed this will then start in place a timeline leading to the [[Auction]] process to determine the final [[Recovery]] price(s).<br /> <br /> == [[Bankruptcy]] ==<br /> This is the catastrophic failure of a corporate (or financial) firm, this sort of Credit Event doesn't apply to Sovereigns/Countries since there's no concept of a Country going Bankrupt.<br /> <br /> This is also one quite a rare Credit Event, usually seen in Asia and Europe because in the US companies will more likely file for Bankruptcy Protection, also known as Chapter 11 and go through a restructuring, but it's not unheard of for a Bankruptcy event to happen.<br /> <br /> == [[Obligation Acceleration]] ==<br /> This is where a bond, for example, becomes due before it's normal maturity, for example your 30 year bond suddenly becomes a 2 year bond. There's a specific threshold amount that is required to be exceeded before this triggers and obviously any call or put provisions that are already in the bond's structure don't count.<br /> <br /> In a lot of cases, shortening a bond will result in a worse position for the investor - think of negative convexity in the mortgage bond market, but if a company has money to pay the amount outstanding it's unlikely to be a low Recovery event. This is one of the less common Credit Events.<br /> <br /> == [[Obligation Default]] ==<br /> Much like [[Obligation Acceleration]] there is a minimum threshold that must be exceeded but for this Credit Event to trigger a bond which is due to be paid is not paid and therefore is in Default.<br /> <br /> It is unlikely that an Obligation Default will not be accompanied by a [[Failure to Pay]] or in fact preceded by a Failure to Pay.<br /> <br /> == [[Failure to Pay]] ==<br /> The Failure to Pay Credit Event, also known as Payment Default, does pretty much what it says on the tin. It's where a payment is due under a contract and has not been paid. This contract could be the payment of coupons or principal on a bond, it could be on a bank loan or just any financial contract where payments are due. There are a couple of requirements, firstly there is a threshold amount, you couldn't trigger a Credit Event off the back of a $10 lunch reimbursement for example, and also there is a grace period whereby the company is given an amount of time to remedy the situation, to make sure that a Credit Event can't be triggered just because of a clerical error, or a Bank Holiday preventing settlement.<br /> <br /> == [[Moratorium]] ==<br /> Repudiation and Moratorium are usually lumped together and are generally most applicable to Sovereign credits, this is a situation whereby the Government will just Repudiate the debt (&quot;Nah that doesn't belong to me, never seen it before, could be someone else's but it's definitely not mine... Have you tried lost and found?&quot;) or they declare a Debt Moratorium. (&quot;Yeah it's definitely mine but the cupboards are bare, you ain't getting anything, sorry&quot;)<br /> <br /> Along with Restructuring these are the most common Sovereign Credit Events.<br /> <br /> == Restructuring ==<br /> When companies start struggling but it's an orderly event (read: NOT LEHMAN) then there is usually time for either a Chapter 11 Bankruptcy protection or something similar in Europe and Asia, the end result is that the Debt gets restructured, maybe your 5 year bond becomes a 25 year bond. Maybe your claim for 100 USD becomes a claim for 20 USD or maybe someone jumps ahead of you in the seniority capital structure.<br /> <br /> The bottom line is that the bond you had is different to the one you used to have.<br /> <br /> Credit Derivatives have a number of different Restructuring clauses which can be used in different scenarios - initially we started with &quot;Full Restructuring&quot; ('''FR''') which was hoped to be all that the market needed.<br /> <br /> Unfortunately this didn't really capture some of the nuances of the US Investment Grade market and a modification was introduced back around 2001 and you had US names trading with &quot;Modified Restructuring&quot; ('''Mod-R''' or '''MR''')<br /> <br /> It was then noted that European and UK legislation didn't fit into the Mod-R landscape but also FR wasn't doing the job so &quot;Modified Modified Restructuring&quot; ('''Mod-Mod-R''', '''MMR''' or '''MM''') was introduced in 2003 and then implemented very broadly via the [[Big Bang and Small Bang|Small Bang]] Protocol in 2009.<br /> <br /> Finally the market worked out that even Mod-R didn't really work for the US High Yield market so most US High Yield names trade with &quot;No Restructuring&quot; ('''NR''') - this seemed to work best for these companies as they were less likely to be restructured anyway.<br /> <br /> The [https://www.bis.org/publ/qtrpdf/r_qt0503h.pdf BIS has a paper] in their Quarterly review of 2005 by Frank Packer and Haibin Zhu on this.</div>

DrKazza https://creditderivs.com/index.php?title=Credit_Event&diff=37 2023-03-16T16:23:49Z

<p>DrKazza: consolidated Credit Event pages</p> <hr /> <div>A Credit Event is the thing that will trigger a change in cashflows on a Credit Derivative.<br /> <br /> There are typically 6 things that can trigger a Credit Event:<br /> <br /> * [[Bankruptcy]]<br /> * [[Obligation Acceleration]]<br /> * [[Obligation Default]]<br /> * Payment Default ([[Failure to Pay]])<br /> * [[Moratorium|Repudiation]]/[[Moratorium]]<br /> * [[Restructuring]]<br /> <br /> These all have very specific terminology as defined by [https://www.isda.org/ ISDA]<br /> <br /> When someone believes that a Credit Event has occurred they will post a question to the [https://www.cdsdeterminationscommittees.org/ Credit Derivatives Determinations Committee] who will review the evidence and if a Credit Event has indeed occurred they will publish the results and also the exact date of this event which is called the Event Determination Date.<br /> <br /> After a Credit Event has been confirmed this will then start in place a timeline leading to the [[Auction]] process to determine the final [[Recovery]] price(s).<br /> <br /> == [[Bankruptcy]] ==<br /> This is the catastrophic failure of a corporate (or financial) firm, this sort of Credit Event doesn't apply to Sovereigns/Countries since there's no concept of a Country going Bankrupt.<br /> <br /> This is also one quite a rare Credit Event, usually seen in Asia and Europe because in the US companies will more likely file for Bankruptcy Protection, also known as Chapter 11 and go through a restructuring, but it's not unheard of for a Bankruptcy event to happen.<br /> <br /> == [[Obligation Acceleration]] ==<br /> This is where a bond, for example, becomes due before it's normal maturity, for example your 30 year bond suddenly becomes a 2 year bond. There's a specific threshold amount that is required to be exceeded before this triggers and obviously any call or put provisions that are already in the bond's structure don't count.<br /> <br /> In a lot of cases, shortening a bond will result in a worse position for the investor - think of negative convexity in the mortgage bond market, but if a company has money to pay the amount outstanding it's unlikely to be a low Recovery event. This is one of the less common Credit Events.<br /> <br /> == [[Obligation Default]] ==<br /> Much like [[Obligation Acceleration]] there is a minimum threshold that must be exceeded but for this Credit Event to trigger a bond which is due to be paid is not paid and therefore is in Default.<br /> <br /> It is unlikely that an Obligation Default will not be accompanied by a [[Failure to Pay]] or in fact preceded by a Failure to Pay.<br /> <br /> == [[Failure to Pay]] ==<br /> The Failure to Pay Credit Event, also known as Payment Default, does pretty much what it says on the tin. It's where a payment is due under a contract and has not been paid. This contract could be the payment of coupons or principal on a bond, it could be on a bank loan or just any financial contract where payments are due. There are a couple of requirements, firstly there is a threshold amount, you couldn't trigger a Credit Event off the back of a $10 lunch reimbursement for example, and also there is a grace period whereby the company is given an amount of time to remedy the situation, to make sure that a Credit Event can't be triggered just because of a clerical error, or a Bank Holiday preventing settlement.<br /> <br /> == [[Moratorium]] ==<br /> Repudiation and Moratorium are usually lumped together and are generally most applicable to Sovereign credits, this is a situation whereby the Government will just Repudiate the debt (&quot;Nah that doesn't belong to me, never seen it before, could be someone else's but it's definitely not mine... Have you tried lost and found?&quot;) or they declare a Debt Moratorium. (&quot;Yeah it's definitely mine but the cupboards are bare, you ain't getting anything, sorry&quot;)<br /> <br /> Along with Restructuring these are the most common Sovereign Credit Events.<br /> <br /> == Restructuring ==<br /> When companies start struggling but it's an orderly event (read: NOT LEHMAN) then there is usually time for either a Chapter 11 Bankruptcy protection or something similar in Europe and Asia, the end result is that the Debt gets restructured, maybe your 5 year bond becomes a 25 year bond. Maybe your claim for 100 USD becomes a claim for 20 USD or maybe someone jumps ahead of you in the seniority capital structure.<br /> <br /> The bottom line is that the bond you had is different to the one you used to have.<br /> <br /> Credit Derivatives have a number of different Restructuring clauses which can be used in different scenarios - initially we started with &quot;Full Restructuring&quot; ('''FR''') which was hoped to be all that the market needed.<br /> <br /> Unfortunately this didn't really capture some of the nuances of the US Investment Grade market and a modification was introduced back around 2001 and you had US names trading with &quot;Modified Restructuring&quot; ('''Mod-R''' or '''MR''')<br /> <br /> It was then noted that European and UK legislation didn't fit into the Mod-R landscape but also FR wasn't doing the job so &quot;Modified Modified Restructuring&quot; ('''Mod-Mod-R''', '''MMR''' or '''MM''') was introduced in 2003 and then implemented very broadly via the [[Big Bang and Small Bang|Small Bang]] Protocol in 2009.<br /> <br /> Finally the market worked out that even Mod-R didn't really work for the US High Yield market so most US High Yield names trade with &quot;No Restructuring&quot; ('''NR''') - this seemed to work best for these companies as they were less likely to be restructured anyway.<br /> <br /> The [https://www.bis.org/publ/qtrpdf/r_qt0503h.pdf BIS has a paper] in their Quarterly review of 2005 by Frank Packer and Haibin Zhu on this.</div>

DrKazza https://creditderivs.com/index.php?title=CDEA&diff=36 2023-01-18T10:05:50Z

<p>DrKazza: Created page with &quot;A CDEA is a Cleared Derivatives Execution Agreement, it can be a level of fallback security when trading Cleared OTC Derivatives to make sure that the trade will still stand if clearing fails. The principle is that a SEF/MTF provides a trading platform/venue and anyone who has access to that venue will be able to trade with any of the dealers providing prices whether or not any other legal documentation is in place, howev...&quot;</p> <hr /> <div>A CDEA is a Cleared Derivatives Execution Agreement, it can be a level of fallback security when trading [[Cleared and Bilateral Trades|Cleared]] OTC Derivatives to make sure that the trade will still stand if clearing fails.<br /> <br /> The principle is that a [[SEF and MTF|SEF/MTF]] provides a trading platform/venue and anyone who has access to that venue will be able to trade with any of the dealers providing prices whether or not any other legal documentation is in place, however should the Clearing Member for whatever reason be unable to allow the trade to clear the CDEA is a document that says (in a roundabout way) &quot;If we trade on venue and it fails to clear then we'll fall back to a [[Cleared and Bilateral Trades|Bilateral]] OTC trade with all the same economic terms&quot;.<br /> <br /> Some venues however have made the CDEA largely redundant, before a request for price (RFQ) is sent to the dealers a message is sent to the Clearing Member who will deliver certainty that the trade will clear - with this in place there is no need for fallback provisions, however that does mean that you can only trade comfortably without a CDEA on platforms with that checking mechanism.<br /> <br /> As a result most Sell-side dealers have done away with the need for CDEAs.</div>

DrKazza https://creditderivs.com/index.php?title=Restructuring&diff=35 2023-01-18T09:39:18Z

<p>DrKazza: </p> <hr /> <div>When companies start struggling but it's an orderly event (read: NOT [[wikipedia:Lehman_Brothers|LEHMAN]]) then there is usually time for either a Chapter 11 Bankruptcy protection or something similar in Europe and Asia, the end result is that the Debt gets restructured, maybe your 5 year bond becomes a 25 year bond. Maybe your claim for 100 USD becomes a claim for 20 USD or maybe someone jumps ahead of you in the seniority capital structure.<br /> <br /> The bottom line is that the bond you had is different to the one you used to have.<br /> <br /> Credit Derivatives have a number of different Restructuring clauses which can be used in different scenarios - initially we started with &quot;Full Restructuring&quot; ('''FR''') which was hoped to be all that the market needed.<br /> <br /> Unfortunately this didn't really capture some of the nuances of the US Investment Grade market and a modification was introduced back around 2001 and you had US names trading with &quot;Modified Restructuring&quot; ('''Mod-R''' or '''MR''')<br /> <br /> It was then noted that European and UK legislation didn't fit into the Mod-R landscape but also FR wasn't doing the job so &quot;Modified Modified Restructuring&quot; ('''Mod-Mod-R''', '''MMR''' or '''MM''') was introduced in 2003 and then implemented very broadly via the [[Big Bang and Small Bang|Small Bang]] Protocol in 2009.<br /> <br /> Finally the market worked out that even Mod-R didn't really work for the US High Yield market so most US High Yield names trade with &quot;No Restructuring&quot; ('''NR''') - this seemed to work best for these companies as they were less likely to be restructured anyway.<br /> <br /> The [https://www.bis.org/publ/qtrpdf/r_qt0503h.pdf BIS has a paper] in their Quarterly review of 2005 by Frank Packer and Haibin Zhu on this.</div>

DrKazza https://creditderivs.com/index.php?title=Big_Bang_and_Small_Bang&diff=34 2023-01-18T09:37:20Z

<p>DrKazza: Created page with &quot;After the creation of Credit Derivatives from the 90s there were a number of standardisations introduced to try and help investors get comfortable with the product which, when not standardised introduced some very minor, but potentially unpleasant risks. The Big Bang Protocol happened in April 2009 and covered a lot of different topics and then a Small Bang came into effect in October 2009 which had a lesser effect. === Big Bang: Standard Coupon Rates === Unlike Cash B...&quot;</p> <hr /> <div>After the creation of Credit Derivatives from the 90s there were a number of standardisations introduced to try and help investors get comfortable with the product which, when not standardised introduced some very minor, but potentially unpleasant risks.<br /> <br /> The Big Bang Protocol happened in April 2009 and covered a lot of different topics and then a Small Bang came into effect in October 2009 which had a lesser effect.<br /> <br /> === Big Bang: Standard Coupon Rates ===<br /> Unlike Cash Bonds if you buy protection at 90[[Basis Points|bps]], and then sell protection at 92bps you still have risk to the [[Credit Event]] the reason being if you look at the cashflows you are net long 2bps running. This could carry on for 1 month or 5 years depending on when or if the default happened. Investors wanted to be out of the risk totally and just take an upfront payment.<br /> <br /> The solution was to set all CDS to have the same coupons, so when you bought protection at 90bps, you actually bought protection at 100bps and then received a payment equal to the PV of 10bps to make the economic position the same as had you bought protection at 90bps. So when you then sell protection at 92bps you sell at 100bps and pay the PV of 8bps to make it equal. Now the net resulting position has no residual cashflows and you are totally out of your risk having received the PV of 10bps and paid the PV of 8bps.<br /> <br /> The coupons were set roughly around the level of the underlying CDS, so for any credit trading below about 250bps the coupon was set at 100bps, anything above that was set at 500bps, some very tight names traded at 25bps. The reason for this was to make sure that the upfront payments weren't too large. When a 100bp name widened significantly, the dealing community would start trading with a 250bp coupon but you can always ask for a price with 100bps coupon if that's the position you were unwinding, for example.<br /> <br /> === Big Bang: Full First Coupons ===<br /> Once you have standardised the coupons, you want one single calculator to give you the price of a CDS, you don't want to say &quot;no that's not right I need the contract to start from 29th December&quot;, therefore much like bonds all CDS began trading with a Full First Coupon so that if you bought protection on the 20th Jan and then unwound on the 22nd Jan you didn't have to worry about that 2 days accrued being removed from your P&amp;L, both contracts would have started accruing from the 20th December. CDS pay quarterly a/360 regardless of currency so accrual dates are always 20th March, 20th June, 20th September and 20th December.<br /> <br /> === Big Bang: Standard Effective Dates ===<br /> Now that the coupons rates and accrual dates are all synchronised it's also very important to make sure the Effective Dates are the same. What this means in practice is that if you buy protection on the 20th Jan and then sell protection on the 22nd Jan there is the potential for a credit event to occur in the 21st which will generate a windfall gain for the buy of protection but won't trigger the sell, so to avoid dealers having to ask when the trade was initiated and look for random credit events on specific dates all CDS were determined to have effective dates backdated 60 days for Credit Events and 90 days for Successtion Events.<br /> <br /> === Big Bang: Determinations Committee ===<br /> Instead of individual legal teams at various institutions going through and trying to work out if there had been a [[Succession]] event or a [[Credit Event]] it was decided that all determinations would be made by a [https://www.cdsdeterminationscommittees.org/ CDS Determinations Committee] where firms could submit evidence and the Committee would publish a decision on that basis.<br /> <br /> === Big Bang: Auctions Protocol ===<br /> As the Credit Derivatives markets grew the [[Auction Process]] became more cumbersome and there were instances where the amount of bonds to be delivered into outstanding CDS contracts exceeded the amount of bonds outstanding. To avoid this a standardised auction would be run and the final price determined and everyone who did not want to be part of the Auction Process would be cash settled to the final price which would be published on [https://www.creditfixings.com/CreditEventAuctions/fixings.jsp CreditFixings.com].<br /> <br /> === Small Bang: Mod-Mod Restructuring ===<br /> The nuances of the Restructuring process in Europe meant that the [[Restructuring]] mechanism in contracts didn't completely work, so a modified version of the already modified restructuring language (Mod-R) was introduced with added maturity buckets for reference obligations and a couple of other tweaks.</div>

DrKazza https://creditderivs.com/index.php?title=Bootstrap&diff=32 2023-01-12T13:28:03Z

<p>DrKazza: </p> <hr /> <div>Bootstrapping of a Rates or Credit curve is the method of using a number of different term rates to get intermediate forward discount rates.<br /> [[File:Boot Laces.jpg|thumb|Thanks to https://www.ironlace.com/lace-length-guide/ for the image of some boots!]]<br /> The concept comes from if you are putting on a pair of boots, to tighten the laces you need to start at the bottom and work your way up, tightening each level as you work up the boots. In the image shown you should start by tightening 9 and working backwards (up the boot) to 8, then 7 then 6... if you were to start at the highest point (1), when you pull on the laces at 2 it will loosen 1 and you need to start again.<br /> <br /> <br /> In a similar way if you have the rates for 1, 2, 3, 4 and 5 years (from spot), to bootstrap the curve you start with the 1 year rate (1y), then you solve for the 1 year rate 1 year forward (1y1yf), when this is combined with the 1 year rate you should match the rate you have for 2 years.<br /> <br /> Then you move onto the 1 year rate, 2 years forward (1y2yf), and by combining this with the 1y and 1y1yf you solve for the 3y rate<br /> <br /> <br /> <br /> <br /> [[File:Bootstrap Ages.png|thumb|Solving ages given averages]]<br /> <br /> === Simple Averages ===<br /> A numerical example can be done with averages.<br /> <br /> If you have a group of 5 people, the age of the youngest is 10 years, the average age of the two youngest is 13 years. The average age of the three youngest is 15 years, the average age of the 4 youngest is 16.5 years and the average age of all of them is 19 years. <br /> <br /> What is the age of each person?<br /> <br /> Using the letters A-E as the ages of the people, youngest to oldest these represent the [[Forward Curve|Forward points on the Curve]] and the average can represent the term Rates.<br /> <br /> Mathematically:&lt;blockquote&gt;A = 10<br /> <br /> (A+B) / 2 = 13 =&gt; B = 26 -10 = 16<br /> <br /> (A + B + C) / 3 = 15 =&gt; C = 45 - 26 = 19<br /> <br /> (A + B + C + D) / 4 = 16.5 =&gt; D = 66 - 45 = 21<br /> <br /> (A + B + C + D + E) / 5 = 18 =&gt; E = 90 - 66 = 24&lt;/blockquote&gt;It seems trivial but it's obvious you have to start at the bottom and work up. The same can be applied to Bootstrapping of Credit curves and Rates curves where you may know the 1 3 5 7 and 10 year rates but need to work out from the 7 and 10 what the 3y7yf rate is since it's (almost) definitely going to be different from the 7 year or 10 year rates<br /> <br /> === Using Simple Interest Rate Swaps ===<br /> [[File:Bootstrap Rates.png|frame|Bootstrap Solution]]<br /> Taking a bunch of very simple [[IRS]] we can boostrap a curve in Excel. The [[:File:Bootstrap example.xlsx|attached sheet]] will walk you through the process<br /> <br /> If you solve for 0 PV on each interest rate swap you can get a solution as shown on the right.<br /> <br /> A more advance method would be to have a real curve where each intermediate point is set and then a smooth function up to the next point, instead of the example used which is a stepwise function.</div>

DrKazza https://creditderivs.com/index.php?title=File:Bootstrap_Rates.png&diff=31 2023-01-12T13:23:10Z

<p>DrKazza: </p> <hr /> <div>Solution for Bootstrap in Excel</div>

DrKazza https://creditderivs.com/index.php?title=File:Bootstrap_example.xlsx&diff=30 2023-01-12T13:17:55Z

<p>DrKazza: Simple Excel sheet showing how to bootstrap a curve</p> <hr /> <div>== Summary ==<br /> Simple Excel sheet showing how to bootstrap a curve</div>

DrKazza https://creditderivs.com/index.php?title=Main_Page&diff=29 2023-01-12T13:17:17Z

<p>DrKazza: </p> <hr /> <div>&lt;strong&gt;Welcome to CreditDerivs.com a learning resource for many things related to Credit Derivatives.&lt;/strong&gt;<br /> <br /> == WIP ==</div>

DrKazza https://creditderivs.com/index.php?title=Main_Page&diff=28 2023-01-11T15:59:05Z

<p>DrKazza: </p> <hr /> <div>&lt;strong&gt;Welcome to CreditDerivs.com a learning resource for many things related to Credit Derivatives.&lt;/strong&gt;<br /> <br /> Consult the [https://www.mediawiki.org/wiki/Special:MyLanguage/Help:Contents User's Guide] for information on using the wiki software.<br /> <br /> == Getting started ==<br /> * [https://www.mediawiki.org/wiki/Special:MyLanguage/Manual:Configuration_settings Configuration settings list]<br /> * [https://www.mediawiki.org/wiki/Special:MyLanguage/Manual:FAQ MediaWiki FAQ]<br /> * [https://lists.wikimedia.org/mailman/listinfo/mediawiki-announce MediaWiki release mailing list]<br /> * [https://www.mediawiki.org/wiki/Special:MyLanguage/Localisation#Translation_resources Localise MediaWiki for your language]<br /> * [https://www.mediawiki.org/wiki/Special:MyLanguage/Manual:Combating_spam Learn how to combat spam on your wiki]</div>

DrKazza https://creditderivs.com/index.php?title=Bootstrap&diff=27 2023-01-11T15:43:54Z

<p>DrKazza: Added Bootstrap and need to do a worked example with curves rather than averages</p> <hr /> <div>Bootstrapping of a Rates or Credit curve is the method of using a number of different term rates to get intermediate forward discount rates.<br /> [[File:Boot Laces.jpg|thumb|Thanks to https://www.ironlace.com/lace-length-guide/ for the image of some boots!]]<br /> The concept comes from if you are putting on a pair of boots, to tighten the laces you need to start at the bottom and work your way up, tightening each level as you work up the boots. In the image shown you should start by tightening 9 and working backwards (up the boot) to 8, then 7 then 6... if you were to start at the highest point (1), when you pull on the laces at 2 it will loosen 1 and you need to start again.<br /> <br /> <br /> In a similar way if you have the rates for 1, 2, 3, 4 and 5 years (from spot), to bootstrap the curve you start with the 1 year rate (1y), then you solve for the 1 year rate 1 year forward (1y1yf), when this is combined with the 1 year rate you should match the rate you have for 2 years.<br /> <br /> Then you move onto the 1 year rate, 2 years forward (1y2yf), and by combining this with the 1y and 1y1yf you solve for the 3y rate<br /> <br /> <br /> <br /> <br /> [[File:Bootstrap Ages.png|thumb|Solving ages given averages]]<br /> <br /> === Simple Averages ===<br /> A numerical example can be done with averages.<br /> <br /> If you have a group of 5 people, the age of the youngest is 10 years, the average age of the two youngest is 13 years. The average age of the three youngest is 15 years, the average age of the 4 youngest is 16.5 years and the average age of all of them is 19 years. <br /> <br /> What is the age of each person?<br /> <br /> Using the letters A-E as the ages of the people, youngest to oldest these represent the [[Forward Curve|Forward points on the Curve]] and the average can represent the term Rates.<br /> <br /> Mathematically:&lt;blockquote&gt;A = 10<br /> <br /> (A+B) / 2 = 13 =&gt; B = 26 -10 = 16<br /> <br /> (A + B + C) / 3 = 15 =&gt; C = 45 - 26 = 19<br /> <br /> (A + B + C + D) / 4 = 16.5 =&gt; D = 66 - 45 = 21<br /> <br /> (A + B + C + D + E) / 5 = 18 =&gt; E = 90 - 66 = 24&lt;/blockquote&gt;It seems trivial but it's obvious you have to start at the bottom and work up. The same can be applied to Bootstrapping of Credit curves and Rates curves where you may know the 1 3 5 7 and 10 year rates but need to work out from the 7 and 10 what the 3y7yf rate is since it's (almost) definitely going to be different from the 7 year or 10 year rates</div>

DrKazza https://creditderivs.com/index.php?title=File:Bootstrap_Ages.png&diff=26 2023-01-11T15:38:34Z

<p>DrKazza: </p> <hr /> <div>Bootstrapping of Average Ages</div>

DrKazza https://creditderivs.com/index.php?title=File:Boot_Laces.jpg&diff=25 2023-01-11T15:11:48Z

<p>DrKazza: </p> <hr /> <div>Boots with laces labelled for Bootstrapping</div>

DrKazza https://creditderivs.com/index.php?title=Restructuring&diff=18 2023-01-10T16:28:27Z

<p>DrKazza: </p> <hr /> <div>When companies start struggling but it's an orderly event (read: NOT [[wikipedia:Lehman_Brothers|LEHMAN]]) then there is usually time for either a Chapter 11 Bankruptcy protection or something similar in Europe and Asia, the end result is that the Debt gets restructured, maybe your 5 year bond becomes a 25 year bond. Maybe your claim for 100 USD becomes a claim for 20 USD or maybe someone jumps ahead of you in the seniority capital structure.<br /> <br /> The bottom line is that the bond you had is different to the one you used to have.<br /> <br /> Credit Derivatives have a number of different Restructuring clauses which can be used in different scenarios - initially we started with &quot;Full Restructuring&quot; ('''FR''') which was hoped to be all that the market needed.<br /> <br /> Unfortunately this didn't really capture some of the nuances of the US Investment Grade market and a modification was introduced back around 2001 and you had US names trading with &quot;Modified Restructuring&quot; ('''Mod-R''' or '''MR''')<br /> <br /> It was then noted that European and UK legislation didn't fit into the Mod-R landscape but also FR wasn't doing the job so &quot;Modified Modified Restructuring&quot; ('''Mod-Mod-R''', '''MMR''' or '''MM''') was introduced in 2003.<br /> <br /> Finally the market worked out that even Mod-R didn't really work for the US High Yield market so most US High Yield names trade with &quot;No Restructuring&quot; ('''NR''') - this seemed to work best for these companies as they were less likely to be restructured anyway.<br /> <br /> The [https://www.bis.org/publ/qtrpdf/r_qt0503h.pdf BIS has a paper] in their Quarterly review of 2005 by Frank Packer and Haibin Zhu on this.</div>

DrKazza https://creditderivs.com/index.php?title=Restructuring&diff=17 2023-01-10T16:27:56Z

<p>DrKazza: Created page with &quot;When companies start struggling but it's an orderly event (read: NOT LEHMAN) then there is usually time for either a Chapter 11 Bankruptcy protection or something similar in Europe and Asia, the end result is that the Debt gets restructured, maybe your 5 year bond becomes a 25 year bond. Maybe your claim for 100 USD becomes a claim for 20 USD or maybe someone jumps ahead of you in the seniority capital structure. The bottom line is that the...&quot;</p> <hr /> <div>When companies start struggling but it's an orderly event (read: NOT [[wikipedia:Lehman_Brothers|LEHMAN]]) then there is usually time for either a Chapter 11 Bankruptcy protection or something similar in Europe and Asia, the end result is that the Debt gets restructured, maybe your 5 year bond becomes a 25 year bond. Maybe your claim for 100 USD becomes a claim for 20 USD or maybe someone jumps ahead of you in the seniority capital structure.<br /> <br /> The bottom line is that the bond you had is different to the one you used to have.<br /> <br /> Credit Derivatives have a number of different Restructuring clauses which can be used in different scenarios - initially we started with &quot;Full Restructuring&quot; (FR) which was hoped to be all that the market needed.<br /> <br /> Unfortunately this didn't really capture some of the nuances of the US Investment Grade market and a modification was introduced back around 2001 and you had US names trading with &quot;Modified Restructuring&quot; (Mod-R)<br /> <br /> It was then noted that European and UK legislation didn't fit into the Mod-R landscape but also FR wasn't doing the job so &quot;Modified Modified Restructuring&quot; (Mod-Mod-R, MMR or MM) was introduced in 2003.<br /> <br /> Finally the market worked out that even Mod-R didn't really work for the US High Yield market so most US High Yield names trade with &quot;No Restructuring&quot; (NR) - this seemed to work best for these companies as they were less likely to be restructured anyway.<br /> <br /> The [https://www.bis.org/publ/qtrpdf/r_qt0503h.pdf BIS has a paper] in their Quarterly review of 2005 by Frank Packer and Haibin Zhu on this.</div>

DrKazza https://creditderivs.com/index.php?title=Credit_Event&diff=15 2023-01-10T15:34:23Z

<p>DrKazza: </p> <hr /> <div>A Credit Event is the thing that will trigger a change in cashflows on a Credit Derivative.<br /> <br /> There are typically 6 things that can trigger a Credit Event:<br /> <br /> * [[Bankruptcy]]<br /> * [[Obligation Acceleration]]<br /> * [[Obligation Default]]<br /> * Payment Default ([[Failure to Pay]])<br /> * [[Moratorium|Repudiation]]/[[Moratorium]]<br /> * [[Restructuring]]<br /> <br /> These all have very specific terminology as defined by [https://www.isda.org/ ISDA]<br /> <br /> <br /> When someone believes that a Credit Event has occurred they will post a question to the [https://www.cdsdeterminationscommittees.org/ Credit Derivatives Determinations Committee] who will review the evidence and if a Credit Event has indeed occurred they will publish the results and also the exact date of this event which is called the Event Determination Date.<br /> <br /> <br /> After a Credit Event has been confirmed this will then start in place a timeline leading to the [[Auction]] process to determine the final [[Recovery]] price(s).</div>

DrKazza https://creditderivs.com/index.php?title=Credit_Event&diff=14 2023-01-10T13:53:12Z

<p>DrKazza: Credit Credit Event</p> <hr /> <div>A Credit Event is the thing that will trigger a change in cashflows on a Credit Derivative.<br /> <br /> There are typically 6 things that can trigger a Credit Event:<br /> <br /> * Bankruptcy<br /> * Obligation Acceleration<br /> * Obligation Default<br /> * Payment Default (Failure to Pay)<br /> * Repudiation/Moratorium<br /> * Restructuring<br /> <br /> These all have very specific terminology as defined by [https://www.isda.org/ ISDA]<br /> <br /> <br /> When someone believes that a Credit Event has occurred they will post a question to the [https://www.cdsdeterminationscommittees.org/ Credit Derivatives Determinations Committee] who will review the evidence and if a Credit Event has indeed occurred they will publish the results and also the exact date of this event which is called the Event Determination Date.<br /> <br /> <br /> After a Credit Event has been confirmed this will then start in place a timeline leading to the [[Auction]] process to determine the final [[Recovery]] price(s).</div>

DrKazza https://creditderivs.com/index.php?title=Credit_Derivs:General_disclaimer&diff=13 2023-01-10T11:46:36Z

<p>DrKazza: Created page with &quot;This is an educational resource for all things Credit Derivative related. Do not use it as an investment tool, if you do and you lose money then you are the tool.&quot;</p> <hr /> <div>This is an educational resource for all things Credit Derivative related. Do not use it as an investment tool, if you do and you lose money then you are the tool.</div>

DrKazza https://creditderivs.com/index.php?title=File:Logo-on-white-300x112.png&diff=11 2021-07-01T12:40:15Z

<p>DrKazza: </p> <hr /> <div></div>

DrKazza https://creditderivs.com/index.php?title=File:Icon-150x150.png&diff=10 2021-07-01T12:39:27Z

<p>DrKazza: </p> <hr /> <div></div>

DrKazza https://creditderivs.com/index.php?title=File:Cropped-icon-192x192.png&diff=9 2021-07-01T12:39:05Z

<p>DrKazza: </p> <hr /> <div></div>

DrKazza https://creditderivs.com/index.php?title=File:Cropped-icon-32x32.png&diff=8 2021-07-01T12:38:47Z

<p>DrKazza: </p> <hr /> <div></div>

DrKazza