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KYNEX Bulletin June 2004 |
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In this issue, we are pleased to give additional insight into the functionality of Credit Default Swaps and the Convertible Hedge Calculator. In this issue Tutorial:
Convertible Hedge Calculator Visit us on the web:E-Mail your suggestions and comments to: Copyright © 1996 - 2004 |
The
financial markets have witnessed an explosive growth in Credit Default Swaps
(CDS) over the past few years. The simplest CDS is essentially an insurance
policy against a future credit event, usually defined as bankruptcy or a
failure to pay interest or principal on a debt security (the reference
entity). The buyer of the vanilla CDS
pays periodic (usually quarterly) deal payments to the seller at the end of
every period until the sooner of maturity or default. If default occurs, the buyer surrenders the
defaulted security to the seller and pays a final accrual payment. The seller of the CDS pays nothing to the
buyer until default. If default occurs, the seller is obligated to pay the
full notional amount of the swap to the buyer. Tutorial: Convertible
Hedge Calculator The Convertible Hedge Calculator allows you to analyze a convertible security that is hedged with the underlying common stock. You can dynamically change the amount of hedge, convertible and stock prices, assumptions such as financing and rebate rates, carry horizon, and margin requirements, etc. and analyze the expected static (assuming convertible and stock prices do not change) as well as realistic (estimating the accretion/decay in the value of the convertible over the holding period) cash flows, and hence the expected return on capital deployed. |
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