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Salmon, How all CDS are at risk of not paying out, here. The twist here is the timing of two things: 1. the actual default or contracted cashflow non payment and 2. the recovery auction. We already saw that ISDA needs to wait until a cashflow payment is actually missed before recognizing/declaring a default. 20 Mar seems to be the critical date for Hellenic Republic bonds cashflow payments. If the defaulting issuer can restructure its debt after ISDA recognizes the default but before the recovery auction and restructure so that all the old bonds are redeemed for new bonds trading close to par then the recovery rate auction may be forced to a high (close to par) recovery rate for CDS payouts. The CDS recovery determination process would be effectively decoupled from the old bonds that the CDS protection was presumably hedging. Such timing would force the CDS holder to accept the restructuring write down NPV(old bond) – NPV(new bond) simply by forcing a rapid mandatory old bond redemption for the Greek-law (and possibly English-law) bonds. Salmon points out this is not simply a sovereign CDS documentation issue but applies to corporate CDS as well.
TabbForum, Sungard, Do you really know how to price an interest rate swap, here. OIS pricing for swaps outline. Libor has credit spread component since it is the spread for AA bank lending. For many years this credit spread hovered around under 10 bps, didn’t have much volatility, and was effectively ignored for IR swap valuation and risk. The Swap discounting curve and the coupon projecting curve were one and the same, the “risk free rate.” 2008 happened, Libor spreads widened with the AA bank spreads widening and becoming volatile. Swap market participants decided to reexamine the idea of Libor being the risk free rate with respect to Swap valuation. The main idea is to use the Fed Funds overnight rate for discounting expected future cashflows in USD (and corresponding overnight rates in other currencies). This Sungard paper walks you through some of the details and implications of switching to OIS valuation.
Bloomberg, IBM’s Watson Computer Gets a Wall Street Job, here ( tip P. Druck). Wow, Jeopardy champ meets Firm Risk. Watson hardware is a rack of Power 750s with 45nm 8-core Power 7 microprocessors.
HP, H.J. Boehm, Threads Cannot be Implemented as a Library, here.
Wired, Intel Uncloaks New Xeon Chips for the Data Center Set, here. Sandy Bridge EP architecture dual sockets Ars, Intel.
Take a look at the blog Quantivity for the series How to Learn Algorithmic Trading, here. The blog roll looks interesting as well.
Coding the markets blog, early vs late binding, here. Read for a bit.
DeLong’s obit for Milton Friedman, an absurdly good read, here.
FINCAD summary of modeling assumptions behind the ISDA CDS Standard Model, here.
ISDA 2009 Announcement, here via Zerohedge: In a historic event that went largely unnoticed, last night ISDA disclosed it is open sourcing JP Morgan’s legendary CDS Standard Model which it got ownerships of on January 29, thereby issuing a challenge to the global community of financial white hats to decompile the code and figure out just what the voodoo is the wizards in JP Morgan’s Quantitative Research group have put together over the ages.
Markit on the North American Market standardization for CDS, here.
ISDA 2007 Research overview Credit Derivatives David Mengle, here.
JP Morgan’s original Guide to Credit Derivatives, here.
Terry Benzschawel and Alper Corlu, Citi Research on Credit Derivatives, here.
ISDA and Markit offer the CDS JPM CDS code here for open source download since about 2009.
James Zucker ported the code to an iPhone and recounted the tale in My First iPhone App. You can get the App from iTunes for free its called …iCDS from iJAZ Software.
Dominic O’Kane has/had his own web based calculator based on his 2008 book Modeling Single-name and Multi-name Credit Derivatives which is in turn based on a very good Lehman research report O’Kane published with Stuart Turnbull in 2003, Valuation of Credit Default Swaps.
Hull and White 2003 on Valuation of a CDO and an nth to Default CDS Without Monte Carlo Simulation. If there is a broker dealer running a PDE solver on their Credit Derivative inventory for daily P&L, find out who the head of quantitative research is there and bow before that guy because he has achieved Steve Jobs-level marketing skills.
Matlab CDS pricer, here.
BionicTurtle has a YouTube video of how to run a CDS valuation on a spreadsheet, here. Appears to be the tip of iceberg of You Tube videos explaining Credit Derivatives
I cannot seem to find a simple listing of the current market standard definitions for US Single name Corporate Credit Default Swaps (CDS) so I’m going to put a list here. I have found a sample term sheet circa 2004 from NYU/Stern which is useful. The problem is that between the various quantitative descriptions of how to value a credit default swap and the contractual descriptions of what constitutes a credit default swap there is a missing descriptive piece that scrupulously enumerates what data is specifically needed to actually value a credit default swap. Quant treatments typically dismiss this as an exercise for the reader in the quest for wider applied math scope. The ISDA/Contractual folks similarly want to be as complete as possible so they typically lean towards presenting a catalog of every possible data field. There are several different markets that trade credit default swaps each with their own set of market conventions. There are various conventions for US Corporates, European Corporates, Emerging Market, CDS hedges to CDX, Loans , Preferreds, etc. The trick is, if you want to reproduce market prices you need to use the appropriate conventions. For example, US Corp CDS pay premium quarterly whereas a Brazil Sovereign CDS is going to pay premium semiannually. The CDS Trade conventions presented below are applicable to understanding JPM Quantitative Research group analytics available via 2009 JP Morgan/ISDA Open Source agreement. Credit mag took a shot here in 2005; and FT-IDC still closer here;
- Value Date: T
- Trade Date: Negotiated
- Effective Date: Trade Date + 1
- Definitions: ISDA 2003
- Calendar: US
- Day Count Basis: ACT/360
- Premium Frequency: 4 IMM roll dates per year- 20Mar, 20Jun, 20Sep, 20Dec modified following
- Currency: US Dollar
- Coupon Accrual on Default: YES
- Libor Curve: Market level USD Libor term structure mark; BBA;
- Credit Spreads: Market level – term structure mark
- Recovery Rate: Market level – typically constant mark
- Deliverable Debt Class: Senior Debt
- Credit Event: Modified Restructuring, Bankruptcy, Failure to Pay
- Premium: negotiated; Points upfront;
- Notional: negotiated
- Maturity Date: negotiated – in given year one of the IMM roll dates – 20Mar, 20Jun, 20Sep, 20Dec modified following
- Termination Delivery: Physical Settlement
