1 00:00:00,025 --> 00:00:04,580 [CROSSTALK] 2 00:00:04,580 --> 00:00:06,620 Topic for today is Credit Default Swaps. 3 00:00:07,980 --> 00:00:11,490 And I promised you, I've been promising for the whole semester that we 4 00:00:11,490 --> 00:00:15,770 could use our same balance sheet structure to talk about credit default swaps. 5 00:00:15,770 --> 00:00:17,570 and so now I have to deliver on that promise. 6 00:00:18,790 --> 00:00:20,810 so let's just think for, just let me give, 7 00:00:20,810 --> 00:00:23,740 give you as a way of motivation, motivating this, have 8 00:00:23,740 --> 00:00:26,980 a look here at this What I'm showing on 9 00:00:26,980 --> 00:00:29,830 this, on this slide here, this is from the internet, 10 00:00:29,830 --> 00:00:35,280 is the, there's a company called market.com and it 11 00:00:35,280 --> 00:00:37,500 says, if you can read that, it says, market CDX 12 00:00:37,500 --> 00:00:40,460 family of indices is the standard North American in emerging 13 00:00:40,460 --> 00:00:43,850 markets tradable credited default swap family of indices world wide. 14 00:00:43,850 --> 00:00:44,540 Okay. 15 00:00:44,540 --> 00:00:48,220 So they have, these are indices of credit default swaps. 16 00:00:49,410 --> 00:00:51,550 Which I haven't defined yet, but it's a. 17 00:00:51,550 --> 00:00:55,140 And I'm looking down here and here, you can see there, a key 18 00:00:55,140 --> 00:00:57,990 functions, exposure to corporate credits, exposure 19 00:00:57,990 --> 00:01:00,760 to diversified portfolio credit, hedge credit risk. 20 00:01:00,760 --> 00:01:04,300 We're going to see in what sense credit default swaps can do that. 21 00:01:04,300 --> 00:01:07,570 Enhance liquidity in a single name market, the liquidity of the index flows 22 00:01:07,570 --> 00:01:11,860 into single name CDS market, we'll be talking about that as, as well. 23 00:01:11,860 --> 00:01:15,870 So these are, these are indices, let me show you one of them. 24 00:01:17,360 --> 00:01:18,660 So there, this is. 25 00:01:20,310 --> 00:01:22,220 and then, and then we're going to get behind this. 26 00:01:22,220 --> 00:01:26,140 So, what this is showing is on the left 27 00:01:26,140 --> 00:01:29,840 hand you see there basis point spread, basis points. 28 00:01:29,840 --> 00:01:32,420 So these are basis points over, over some risk 29 00:01:32,420 --> 00:01:34,650 list rating, like a treasury rating and you can 30 00:01:34,650 --> 00:01:37,900 see that you have 450 basis points there, is 31 00:01:37,900 --> 00:01:40,690 the, is the lowest one and 580 is the largest. 32 00:01:40,690 --> 00:01:44,780 So these are, these are credit spreads okay, these are corporate bond rates. 33 00:01:44,780 --> 00:01:45,350 That are that 34 00:01:45,350 --> 00:01:48,610 many basis points, okay, over, over, over treasury rates. 35 00:01:48,610 --> 00:01:51,225 So these are not triple a bonds that we are talking about here. 36 00:01:51,225 --> 00:01:54,649 In fact, CDXNAHY stands for, this is 37 00:01:54,649 --> 00:02:00,180 the corporate bond index, North America, high yield. 38 00:02:00,180 --> 00:02:03,820 High yield means junk bonds, okay, is, is what it means. 39 00:02:03,820 --> 00:02:07,190 And the, you can see the index spread is red. 40 00:02:07,190 --> 00:02:10,740 So, there's fluctuation in that spread from 27th 41 00:02:10,740 --> 00:02:14,620 of September, this year to, to now. Fluctuation that's spread. 42 00:02:14,620 --> 00:02:17,760 And they create an index which moves inversely to that, 43 00:02:17,760 --> 00:02:22,550 which they set at 100 in that index, is approximately. 44 00:02:22,550 --> 00:02:25,530 look like it lines up with about 530, okay. 45 00:02:25,530 --> 00:02:29,950 So, their, their, their setting the index so that it fluctuates 46 00:02:29,950 --> 00:02:33,640 and the, and you can write CDS against this and so forth. 47 00:02:33,640 --> 00:02:35,560 Let me just show you one more thing about that. 48 00:02:35,560 --> 00:02:40,750 Constituents here, so, this is an index and what's in the index, here you can 49 00:02:40,750 --> 00:02:45,310 see, oh it slides over there, maybe it does it better on this side, yeah. 50 00:02:45,310 --> 00:02:47,210 You can read it on this side. 51 00:02:47,210 --> 00:02:51,190 You can see the different companies, there's 100 different companies there, 52 00:02:52,410 --> 00:02:56,150 there's the reference obligation, you can see the rating of this. 53 00:02:56,150 --> 00:03:00,550 They're b, double b, triple c, okay so these are low ratings okay. 54 00:03:00,550 --> 00:03:01,820 These, these, these bonds. 55 00:03:02,910 --> 00:03:05,640 and this is the percentage weight in the index, so there's 56 00:03:05,640 --> 00:03:08,899 100 of them, each one is 1% weight in, in the index. 57 00:03:10,340 --> 00:03:12,340 and this is the, this is the kind of 58 00:03:12,340 --> 00:03:16,200 object that's underlying credit default swaps for the lecture today. 59 00:03:16,200 --> 00:03:18,400 Have in mind that we're thinking about a 60 00:03:18,400 --> 00:03:21,000 corporate bond that has a lot of credit risk. 61 00:03:21,000 --> 00:03:25,730 Okay, and a credit default swap is a way of peeling that risk off and 62 00:03:25,730 --> 00:03:29,040 selling it separately, just as an interest rate swap. 63 00:03:29,040 --> 00:03:32,470 Is a way of peeling off interest rate exposure and selling it separately. 64 00:03:32,470 --> 00:03:34,940 Okay, so that's just to have in your mind.