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Credit Default Swaps in Emerging Markets. I. Correlation Between
Recovery Value and Probability of Default .....3 II. ...
... in practice credit risk using credit default swaps: • Filling a ... his position to the
default/credit event and ... as an example many emerging market countries do ...
... its exposure to a particular emerging country by ... are a concern among regulators of
financial markets. ... a riskglossary Documenting credit default swaps on asset ...
... Emerging Market Corporate Debt Emerging Market Bilateral ... and much less liquid than
the markets for high ... 12 In credit default swaps and other credit derivative ...
... a counterparty reducing the maximum loss from credit risk in the event of counterparty
default. ... contracts, interest-rate swaps, currency swaps, and options ...
Submitted by Discobender on October 11, 2007
Category: Business
Words: 1276 | Pages: 6
Views: 155
Popularity Rank: 68,295
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I. Correlation Between Recovery Value and Probability of Default .........................................3
II. An Alternate Methodology: The Cheapest-to-Deliver Bonds for Argentina and Brazil .......4
III. Implication of CDS Spreads for Distressed Emerging Markets ...........................................6
Figures
1. Credit Default Swap in Practice .............................................................................................3
2. Argentine Bonds at Default ...................................................................................................4
3. Default Probabilities using Cheapest-to-Deliver Bonds .........................................................5
4. Brazil¡¯s CDS Spreads in 2002 ................................................................................................5
References...................................................................................................................................7
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An Alternative Methodology for Proxying Recovery Value in Credit Default Swap Contracts
In times of distress when a country loses access to markets, there is evidence that credit default swap
(CDS) spreads are a leading indicator for sovereign risk than the EMBI+ sub-index for the country.
However, it is not easy to discern the variables that determine the level of CDS spreads in Emerging
Markets (EM); traders only quote the CDS spreads and not the inputs that are required to calculate
such spreads. This note provides some evidence from Argentina and Brazil that reveals inconsistency
between theory and practice in pricing CDS spreads in EM. This note suggests an alternate
methodology that links CTD (cheapest to deliver) bonds to recovery values assumed in CDS
contracts.
I. CORRELATION BETWEEN RECOVERY VALUE AND PROBABILITY OF DEFAULT
The assumptions underlying the...
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