First SocGen and Risk Magazine's award of Equity Derivatives House of the Year

http://www.risk.co.uk/public/showPage.html?page=685494

now Peleton and EuroHedge awarding credit prize

http://www.hedgefundintelligence.com/Event.aspx?ProductID=7122

http://www.nytimes.com/2008/02/17/business/17swap.html?_r=2&hp=&oref=slogin&pagewanted=all

I intended to comment on this, but forgot, and it wasn't until SeekingAlpha mentioned it that I though I'd comment on it

http://seekingalpha.com/article/65104-a-misleading-chart-on-credit-default-swaps

"Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered. This arrangement was done at just over 36 cents on the dollar; so buyers of protection on Delphi who did not have the bonds received $366.25 for every $1,000 in coverage they had bought. Had they been valuing their Delphi insurance coverage at $1,000 per bond, they would have had to write off that position by $633.75 per $1,000 bond."

There are two problems with this. Firstly as the article points out, noone expects the recovery rate to be zero (unless it has been specified in the contract). Furthermore, it is implied the article implied that the recovery rate is 63%, when in fact BIS say the recovery was 53% (page 46)

http://www.bis.org/publ/qtrpdf/r_qt0606d.pdf

"Under certain circumstances, a shortage of
deliverable debt can drive up the price of such paper beyond the level that
might otherwise be justified by the expected size of repayment. In the case of
Delphi, the settlement price of 63.5% (and an average CDS recovery price of
53.5%) was considerably higher than the settlement prices of other firms from
the same sector or than rating agencies’ estimates of the ultimate recovery
rates on Delphi’s debt."

so, higher than typical 40% assumed recovery rate, but the 40% is a guide not a rule.

A more recent auction - recovery rate was ~40%

http://www.creditfixings.com/information/affiliations/fixings/auctions/cds-2008/cds2.html

http://uk.reuters.com/article/governmentFilingsNews/idUKN1928853020080219

Markit do good daily updates for those that don't already read them

Correction: The recovery rate for the index auction was 63.5, but the average (which would include CDOs where the valuations are performed independently) was 53.5%

http://www.securitization.net/pdf/Nomura/CDO-CDS_20Mar06.pdf

• BOE mortgage approvals

50K NSA (averaged 79k last two Januarys)

http://www.bankofengland.co.uk/statistics/ms/2008/Feb/taba5.4.xls

• Nationwide -0.5%MOM (-0.6% NSA) - 2.7% YOY

• Hometrack -0.2% MOM

http://www.hometrack.co.uk/commentary_survey_250208.aspx

• Land Reg +0.9% MOM

http://www.landreg.gov.uk/assets/library/documents/181181.pdf

 

This latest news has seen the Spreadfair indices recover

from six weeks ago

http://www.noelwatson.com/blog/PermaLink,guid,f6aea8d2-ce5c-42d4-8d20-90fd4d636840.aspx

Talked about this last week

http://www.noelwatson.com/blog/PermaLink,guid,d0edfd9e-c0ab-4276-a0b5-d204829bba2a.aspx

I was worried that it would be similar to his previous lecture, but was pleasantly surprised to discover that it had been updated to include recent events.

Probably the most interesting part of the evening was the analysis of the CPDOs. Taking ABN's SURF as an example, the original version of this paid 200bps over LIBOR and was rated AAA by both S&P and Moodys. Wim's argument was that using the Gaussian copula approach does not accurately model fat tail events (the credit markets are shock driven and do not follow a normal distribution), whereas the Levy model gets a lot closer. Using the Levy process would have given a rating of A.

Also discussed were CDO index tranches (ITRAXX Europe and CDX) and how the Gaussian copula gives a base correlation smile (high correlations have to be entered for more senior tranches to get accurate spreads). Using the Levy process gets a much flatter base correlation.

The next few years will be interesting for credit risk modelling. Could it be that we will find a better way to model correlation than using one variable to model the interaction between 125 companies? Will people finally start to move away from using Gaussian models to those that model the tails more accurately? Is it a good time to launch a CPDO now that spreads are historically high?

Some Fitch analysis on the first generation CPDOs

http://www.windowsitpro.com/mobile/pda/Article.cfm?ArticleID=98404&News=1

Didn't VS2008 get launched last year?

http://www.noelwatson.com/blog/PermaLink,guid,a2c68db2-3cc8-4024-bb91-46d4067f9557.aspx

It doesn't seem long since VS2005 and SQL 2005 were launched

http://www.noelwatson.com/blog/PermaLink,guid,1e4ec06d-b1d6-40cf-97a1-db9f9b71f29a.aspx

I will make the effort to upgrade the web server to 2008 when the next installment of the action pack arrives.

The simple answer is that there don't appear to be many. I have a fair number of people contacting me via the blog asking my views on whether they should do the CQF. When I read postings about alternative courses

http://www.wilmott.com/blogs/dcfc/index.cfm/2008/2/27/Fordham-University-MS-in-Quantitaitve-Finance-MSQF

http://www.bnet.fordham.edu/msqf/faq/index.htm

http://www.wilmott.com/messageview.cfm?catid=16&threadid=59013

it makes you realise that you have to do a lot of research before committing your or you employer's money

After posting a couple of weeks ago about Wilmott and co working on a new way of valuing CDOs,

http://www.noelwatson.com/blog/PermaLink,guid,b9f877c7-6c00-441b-a520-b933493d2e8d.aspx

it seems that initial work is well underway

http://www.wilmott.com/blogs/paul/index.cfm/2008/2/25/Science-in-Finance-VI-True-Sensitivities-CDOs-and-Correlations

I am going to see if I can get involved in some way

I've ordered these from Amazon

• Credit Derivatives: Life after Copulas

http://www.amazon.co.uk/exec/obidos/ASIN/9812709495

• Credit Derivative Strategies: New Thinking on Managing Risk and Return

http://www.amazon.co.uk/exec/obidos/ASIN/1576601870

In the meantime I am rereading Tavokalis' Collateralized Debt Obligations and Structured Finance

http://www.amazon.co.uk/Collateralized-Debt-Obligations-Structured-Finance/dp/0471462209/ref=sr_1_2?ie=UTF8&s=books&qid=1204044324&sr=1-2

 - the recent subprime events make it worth a revisit!

From the CME

http://housingrdc.cme.com/

Seems to be lacking liquidity, but this may be due to time of day.

The latest Case-Shiller numbers were out today

http://calculatedrisk.blogspot.com/2008/02/s-case-shiller-prices-fall-sharply-in.html

and OFHEO

http://calculatedrisk.blogspot.com/2008/02/ofheo-widspread-house-price-declines-in.html

are we 12-18 months behind the U.S. in the U.K?

The router is getting on a bit and has hangs occasionally.

http://www.amazon.co.uk/D-Link-DSL-604-Router/dp/B0000UYB3M

I am hoping this fix will work

http://www.hyiq.org/Library/D-Link_604.html

otherwise I will have to configure the back up Netgear - but will this prove any more reliable?

I've already commented on this,

http://www.noelwatson.com/blog/PermaLink,guid,ca8f0369-3933-4816-a136-b850c306dab1.aspx

but an article in the Independent got me thinking how much the market will be moved in the event of one or more CPDOs unwinding

My initial thoughts were that the unwinding shouldn't move the market a great deal as if this were the case the CPDO would not be a viable product. My reasoning being that if buying large amount of an index moved the market that much, then the twice yearly index rolls, where the CPDOs sell protection on the new series and buy protection on the prior series (to net out their position from the sale six months previous), the costs would be too great. However, looking at the ABN CPDO article

SurfCPDO.pdf (755.98 KB)

they assume a roll cost of only 1bp (see page 29), with no mention of market movements due to large volumes. After some investigation this makes sense. When the CPDO managers trades with a counterparty (typically a flow desk within the same bank as the CPDO structurer) during the roll, the counterparty's net exposure does not change a great deal. They are selling 4.75 year index protection and buying 5.25 year exposure. The index constituents between the two series do not typically change a great deal meaning that the counterparty will not be dramatically changing his risk exposure.

Contrast this with a CPDO unwind where lots of credit protection is sought with no corresponding  buying, and you can see where there may be some trouble ahead. Having said that, it would be good to know how large the CPDO market is in comparison to the amount of Series 8 ITRAXX Europe/CDX issuance to see how large the potential scale of the problem may be - this article thinks $25 billion for CDX and ITRAXX

http://www.reuters.com/article/bondsNews/idUSN2827508620080228

Probably the first article out there where some proper analysis has been undertaken

BarCapCounterparty.pdf (452.09 KB)

and a summary from CreditFlux

http://www.creditflux.com/digest/2008/02/22/barclays+capital+says+cds+counterparty+failure+could+cause+47+billion+of+losses.htm

In summary, BarCap suggest that in the event of a counterparty defaulting, the losses to protection buyers are not as high as the numbers being suggested by others. However, it could be argued that BarCap may be talking up their book!

Seventeen years ago the 3.0 C30A in the Honda NSX was considered cutting edge

http://en.wikipedia.org/wiki/Honda_C_engine#C30A

utilising advanced technologies such as titanium conrods to develop 270bhp. BMW recently released a 3.0 with 272bhp.

http://en.wikipedia.org/wiki/N53

What is most impressive is the C02 output, which at ~170g is not much more than half of the NSX's 290g. The NSX received a LEV certificate in 2000

http://www.hondanews.com/search/release/2653?q=supercar&s=acura

But the question remains - will it sound as good?

http://www.pistonheads.com/doc.asp?c=120&i=5985

"motivating the NSX with any real urgency requires plenty of revs - which not only produces rapid acceleration but THAT noise.

From around 6,000rpm when the VTEC's high lift lobes take over until the limiter cuts in at 8,500rpm the NSX emits a sound that's probably best described as a cross between a roar and a wail. It is quite simply aural ecstasy for petrolheads and it's a pity we didn't grab an MPEG to go with this report because it must rate as one of the best road car soundtracks ever.

This article suggest they are

http://www.nytimes.com/2008/02/17/business/17swap.html?_r=2&dlbk&oref=slogin&oref=slogin

"But during the credit market upheaval in August, 14 percent of trades in these contracts were unconfirmed, meaning one of the parties in the resale transaction was unidentified in trade documents and remained unknown 30 days later. In December, that number stood at 13 percent. Because these trades are unregulated, there is no requirement that all parties to a contract be told when it is sold."

But with settlement platforms such as DTCC

http://www.dtcc.com/

having been around for a while, is this still the case. With a large percentage of dealer to dealer trades going over the IDB's (Inter dealer brokers such as Creditex), this stuff being automatically settled, and the majority of the rest of the sell side trades automatically being settled, I'm not sure where the number comes from

http://ftalphaville.ft.com/blog/2008/02/18/10980/credit-markets-beware-cpdos-on-the-cusp-of-forced-deleveraging/

Not exactly unexpected, a number of people were dubious that something rated AAA could return 200bps over risk free asset

http://alephblog.com/2008/02/22/a-small-victory-lap-on-cpdos/

There was also a very good article on Wilmott a while ago. CPDO's sell on the run protection (currently Series 8) and therefore receive a revenue stream. They are typically levered 15X - which starts to become a problem when you are marking to market in a widening market. They operate using a martingale betting system

http://en.wikipedia.org/wiki/Martingale_(betting_system)

but eventually they reach their limits - be it NAV or leverage. 18 months ago when a raft of CPDOs were launched, this glut of protections selling drove index protection down

http://www.noelwatson.com/blog/PermaLink,guid,38888779-0383-42bb-bcbb-f7f2723bc6c1.aspx

Now it appears the opposite may be happening

According to an FT article it does - apparently BAA are trying to avoid being in Series 9 of the index - due to be launched on 20th March

http://www.ft.com/cms/s/0/937f2be0-e031-11dc-8073-0000779fd2ac.html

http://uk.reuters.com/article/UK_SMALLCAPSRPT/idUKL1076761820070910

"Inclusion in the iTraxx Crossover list of mostly junk-rated European companies generally translates into a premium in a company's cost of protection on credit default swaps (CDS), which provide a kind of insurance against non-payment of corporate debt. The premium comes from the higher levels of activity for companies in the index"

Does higher activity equate to a higher spread? If there are more buyers than sellers this would be the case - one example may be when the market is volatile -  people wanting to buy credit protection tend to buy an index as it is a lot easier than buying the underlying constituents. This sends the index spread wider. If the single names didn't widen an arbitrage would now exist

http://www.noelwatson.com/blog/PermaLink,guid,edc5d058-1a2d-4e43-88a4-d58c63a9cb74.aspx

Easier to execute in theory than in practice - in volatile times, the single name spreads widen and liquidity dries up. Looking at the current XOver spread, it is hard to justify the spreads based on current levels of default (last European default was Parmalat). Hence, it could be argued that the underlying constituents have spreads that are too wide.

However, as with equities and banks having a low P/E ratio, we are taking current, not future assumptions - a lot of things could change!

Wim Schoutens is giving a lecture on credit derivatives and Levy processes at 7City next week

http://www.schoutens.be/

http://en.wikipedia.org/wiki/L%C3%A9vy_process

There is already a similar recorded lecture of his on the CQF website, but it will be good to attend in person so I can ask a few questions. If he gives some example code I will modify my work in progress spreadsheet.

http://www.noelwatson.com/blog/PermaLink,guid,b9f877c7-6c00-441b-a520-b933493d2e8d.aspx

Some of Wim's earlier Levy related work

WimExoticOptions2002.pdf (358.25 KB)

http://ftalphaville.ft.com/blog/2008/02/13/10890/systemic-risk-rises-correlation-hits-new-highs/

Not sure that this statement is correct

"That last - in current markets perhaps utterly obvious - point is worth one final tangent. In a way it cuts right to the heart of the whole subprime fiasco. How did CDO tranches get AAA ratings? Because most rating models don’t - or didn’t - have a correlation metric."

Even if it were, the addition of a correlation metric won't necessarily solve all the problems. The one factor Gaussian copula is the most widely used out there and is know to have its limitations. Wilmott and co and working on a new model - I will wait for this before modifying my spreadsheet

http://www.noelwatson.com/blog/PermaLink,guid,297c1bf3-25b8-4d15-913d-41e9b697ce1c.aspx

• Prices falling for six month in a row

http://www.rics.org/NR/rdonlyres/06197498-AAD8-4789-B8BB-D7164C32971E/0/RICSHousingMarketSurveyJan2008WEB.pdf

• The Land Reg figures have been updated - Greater London was down 5.7% in the quarter

http://news.bbc.co.uk/1/shared/spl/hi/in_depth/uk_house_prices/counties/html/county37.stm

compared to Halifax's -6.3%

http://www.hbosplc.com/economy/includes/19_01_08greater-london.doc

• Can the MPC cut rates any further with inflation and pay settlement rising?

http://www.ft.com/cms/s/0/363de920-d90c-11dc-8b22-0000779fd2ac.html

http://business.timesonline.co.uk/tol/business/economics/article3359893.ece

http://news.bbc.co.uk/1/hi/business/7234389.stm

• Even thought subprime was never a problem in the UK (allegedly), it would seem that the repossessions have a higher percentage of people from this sector than expected

http://news.bbc.co.uk/1/hi/business/7242311.stm

Apparently only 6% of mortgages are subprime on this side of the pond......

• BOE inflation report

http://www.bankofengland.co.uk/publications/inflationreport/ir08febo.pdf

http://www.ft.com/cms/s/88e590f0-d4f8-11dc-9af1-0000779fd2ac.html

I mentioned this last year

http://www.noelwatson.com/blog/PermaLink,guid,1144b6b7-c207-406a-9d6f-69f9684804b9.aspx

http://www.moneyweek.com/file/41437/credit-default-swaps-how-to-spot-the-riskiest-banks.html

A good article, but with a number of things that I don't agree with. The main argument in the article is that you can compare what the bank has to pay for loans in the market (risk free + CDS spread) compared to what it pays its savers. However, this is not comparing apples with apples

• The CDS spread takes into account recovery rate - typically 40% for senior debt and 20% for subordinated. Taking HBOS which the article states has a 5 year senior spread of 70bps. One could argue why not use the subordinated spread of 130 bps, as if the banks defaults, savers will come in below even the subordinated debt holders.
• Why is the 5 year rate being used - the banks typically only lock you in for one year

http://www.alliance-leicester.co.uk/savings/index.asp?page=esaver&ct=savingshome

Alliance and Leicester 1 year subordinated is currently 310bps

Northern Rock does have a CDS spread - 5Y senior is approx. 250bps