Fitch Survey: Credit Default Swap -- CDS -- Options: What They Are, Who Is Using Them, and Why.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of & LONDON -- Credit swaptions are options to buy or sell CDS on either individual corporate reference entities (single names) or traded indices. While smaller than the credit default swap Credit Default Swap A swap designed to transfer the credit exposure of fixed income products between parties. Notes: The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. market, a new survey from Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has found that the credit 'swaptions' market has grown significantly over the past year, possibly doubling in size according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. survey respondents. The article highlights recent developments in the market as well as identifies some key structural features of credit swaptions that investors should appreciate. Over the course of a recent month, the average dealer traded more credit swaptions contracts on single names than on indices, though, in terms of notional value Notional Value The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets because in them a very little amount of invested money can control a large position (have a large consequence for the trader). , activity in index options dwarfed that of individual names by about 5 to 1. While there has been meaningful growth in single name contracts traded over the past year, the majority of trading tends to be dominated by a handful of some of the most active (and volatile) names in the bond and CDS markets. "Investors would be wise to fully understand the unique structural features of credit swaptions. For example, the fact that most single-name options are of the 'knockout' variety, and, therefore, simply cancel (i.e., become worthless) in the event the underlying entity defaults is clearly something that investors should understand," says Jim Batterman, Senior Director, Fitch Ratings. Hedge funds hedge fund, in finance, a highly speculative, largely unregulated investment device. Originating in the 1950s, the funds "hedge" by offsetting "short" positions (borrowing a security and then selling it at a higher price before repaying the lender) against "long" , at 57% of all users, were the dominant user of this instrument. Given the high degree of leverage and short-term nature, it was not surprising to see that about half of surveyed dealers' clients are using credit options contracts for "very short-term speculation," while another 30% are using them to express a "short, but somewhat longer-term view." "Credit Default Swap (CDS) Options: What They Are, Who Is Using Them, and Why" is available at www.fitchcdx.com. |
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