[CROSSTALK]
Topic for today is Credit Default Swaps.
And I promised you, I've been promising
for the whole semester that we
could use our same balance sheet structure
to talk about credit default swaps.
and so now I have to deliver on that
promise.
so let's just think for, just let me give,
give you as a way of motivation,
motivating this, have
a look here at this What I'm showing on
this, on this slide here, this is from the
internet,
is the, there's a company called
market.com and it
says, if you can read that, it says,
market CDX
family of indices is the standard North
American in emerging
markets tradable credited default swap
family of indices world wide.
Okay.
So they have, these are indices of credit
default swaps.
Which I haven't defined yet, but it's a.
And I'm looking down here and here, you
can see there, a key
functions, exposure to corporate credits,
exposure
to diversified portfolio credit, hedge
credit risk.
We're going to see in what sense credit
default swaps can do that.
Enhance liquidity in a single name market,
the liquidity of the index flows
into single name CDS market, we'll be
talking about that as, as well.
So these are, these are indices, let me
show you one of them.
So there, this is.
and then, and then we're going to get
behind this.
So, what this is showing is on the left
hand you see there basis point spread,
basis points.
So these are basis points over, over some
risk
list rating, like a treasury rating and
you can
see that you have 450 basis points there,
is
the, is the lowest one and 580 is the
largest.
So these are, these are credit spreads
okay, these are corporate bond rates.
That are that
many basis points, okay, over, over, over
treasury rates.
So these are not triple a bonds that we
are talking about here.
In fact, CDXNAHY stands for, this is
the corporate bond index, North America,
high yield.
High yield means junk bonds, okay, is, is
what it means.
And the, you can see the index spread is
red.
So, there's fluctuation in that spread
from 27th
of September, this year to, to now.
Fluctuation that's spread.
And they create an index which moves
inversely to that,
which they set at 100 in that index, is
approximately.
look like it lines up with about 530,
okay.
So, their, their, their setting the index
so that it fluctuates
and the, and you can write CDS against
this and so forth.
Let me just show you one more thing about
that.
Constituents here, so, this is an index
and what's in the index, here you can
see, oh it slides over there, maybe it
does it better on this side, yeah.
You can read it on this side.
You can see the different companies,
there's 100 different companies there,
there's the reference obligation, you can
see the rating of this.
They're b, double b, triple c, okay so
these are low ratings okay.
These, these, these bonds.
and this is the percentage weight in the
index, so there's
100 of them, each one is 1% weight in, in
the index.
and this is the, this is the kind of
object that's underlying credit default
swaps for the lecture today.
Have in mind that we're thinking about a
corporate bond that has a lot of credit
risk.
Okay, and a credit default swap is a way
of peeling that risk off and
selling it separately, just as an interest
rate swap.
Is a way of peeling off interest rate
exposure and selling it separately.
Okay, so that's just to have in your mind.