How a credit default swap can be used to hedge the counterparty risk associated with a portfolio of leases and, at the same time, increase the net present value of uncertain lease cash flows is illustrated. Asset finance firms will find that the hedge both reduces the variability of cash flows and hence increases the value of the firm. The article explores the concept of creditworthiness and credit default swaps, constructs a sample portfolio, and evaluates the use of credit default swaps to hedge default risk. The hedged diversified portfolios had higher expected NPVs and higher expected return-to-risk ratios than the unhedged diversified portfolio. A firm with advanced mathematical knowledge could use a proxy hedge such as a basket CDS on the industry sector of the small firm.
Participants in the over-the-counter credit default swaps (CDS) market have sharply reduced the notional amount of CDS contracts outstanding this year through a series of portfolio compression cycles, also known as tear-ups. The decrease in notional outstanding CDS amounts in 2008 reflects a range of activities, including compression exercises run by TriOptima, Creditex and Markit, says the International Swaps and Derivatives Association. Meanwhile, the Depository Trust & Clearing Corporation (DTCC) says its central registry for the CDS market, known as the Trade Information Warehouse, has successfully completed the automated credit-event processing and settlement of over-the-counter CDS contracts related to the bankruptcy of Lehman Brothers. To help increase transparency in the CDS...
There is a way forward, and on Thursday President Obama and Republicans took at least a small step in that direction. That's crucial, because the problem of the debt ceiling, conjoined with the problem of annual budget deficits, has ensnared Congress in a debate so poisonous that doubts have arisen about its ability to compromise on an issue that could be calamitous to the nation's economy and its international standing. The way forward was set out last year by Obama's bipartisan deficit reduction commission, whose drastic prescriptions would lead the country toward a healthier financial outlook while justifying an increase in the debt limit. Democrats would have to take a deep breath, because the commission report called for, among other things, an increase in the age at whi...
NEW YORK, Dec. 20, 2011 /PRNewswire/ -- Data through November 2011, released today by S&P Indices and Experian for the S&P/ Experian Consumer Credit Default Indices, a comprehensive measure of changes in consumer credit defaults, showed that first mortgage and bank card default rates rose to 2.17% and 4.91% in November, from 2.08% and 4.85% in October, respectively. Second mortgage and auto loans default rates decreased slightly; second mortgages moved down from 1.29% in October to 1.26% in November, and auto loans from 1.22% to 1.17%. The increases in first mortgage and bank card rates, however, caused the national composite to rise from 2.15% to 2.22% As we indicated last month, the weight of first mortgage default rates tends to drive the trend in the national composite," says David...
The clock is chiming the 11th hour as the United States approaches on its sovereign debt - or so we are told. The drama over the supposed Aug. 2 deadline always has been contrived. The federal government expects to take in about $172 billion in tax revenues in August. To prevent a technical , the Treasury needs to make interest payments of about $29 billion due Aug. 15. There also is a $90 billion debt in the form of Treasury bills and long-term securities that matures on Aug. 4. In theory, all of these obligations can be met with current tax revenues. These bills can be paid.
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