Category Archives:

derivatives

Now we know how much &#39AAA&#39 rated CDOs are really worth

Carina Ltd, a CDO managed by State Street, is being liquidated after the credit quality of its collateral fell below predetermined levels, allowing senior note holders to force a fire-sale of assets. Carina was originally a $1.5bn CDO when it was launched in September 2006, and is the first CDO to begin unwinding since the credit crunch began. The rating on an AAA rated portion of the CDO was d…

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It don&#39t matter if you&#39re black or white?

We’ve written a lot about the US sub-prime crisis and some of the very nasty housing stats coming out of the US, but sometimes it takes ‘real life’ examples to realise just how bad the situation has become for US homeowners, and how much worse it can get. There was an excellent piece on the BBC website earlier this week, which focused on Cleveland, Ohio – "the sub-prime capital of the United St…

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In defence of CDOs

CDOs (Collateralised Debt Obligations) are being hailed in some quarters as the next split cap catastrophe. As a result of the US sub prime mortgage crisis, some CDOs that are heavily exposed to the US subprime mortgage crisis have fallen dramatically in value and hedge funds that have a big exposure to these CDOs are on the brink of collapse. There are legitimate concerns with some aspects of …

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UCITSIII wider powers, CDS and CDOs – a question from a client

Sent by anonymous, 4 June 2007:

As an investment IFA I can sympathise with the question dated 23.05.07 – in relation to asset allocation and the resultant bond exposure so many stochastic modelling tools tell us to have. We have been underweight in Fixed Interest in general as an asset class for about 1 year now and going overweight in UK commercial property funds. This I am now taking back dow…

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The Sainsbury Rollercoaster

Friday’s statement from a group of private equity houses that they were “in the preliminary stages of assessing” a possible offer for Sainsbury saw its shares rally 17% and the CDS market jump from spreads in the mid 27 bps out to 75 bps. CDS (credit default swaps) reflect the cost of ‘insuring’ against an issuer defaulting on its debt – the higher the risk of credit deterioration, the higher …

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Credit Derivatives to Approach $40 Trillion in 2008

Credit default swaps (CDS) , originally conceived by banks over a decade ago to enable the transfer of credit risk are set to approach $40 trillion in size by the end of 2008 according to Deutsche Bank’s credit strategist John Tierney. Trading in indexes based on credit-default swaps and other variations of derivatives that allow investors to speculate on the ability of companies to repay their…

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Interesting innovations in fixed income – “CPDOs”

One of the latest fixed income innovations are CPDOs, which stands for “Constant Proportion Debt Obligation” – a bit of a mouthful I know. These new products are causing a stir because credit rating agencies such as Moody’s and Fitch have assigned CPDOs with AAA ratings, which is remarkable considering that they offer a yield of 1.5% to 2% above interest rates. So is there really such thing as … Read the article