The Credit Default Swap Basis

<body stylesrc="../_private/template_title.htm" topmargin="10" leftmargin="10" bgcolor="#FFFFFF" link="#333366" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table3"> <tr> <td width="780" align="center"> <div align="center"> <table border="0" cellpadding="5" cellspacing="0" height="206" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table4"> <tr> <td align="right" height="198" width="1%"> <p align="left"> <img border="0" src="../images/book_choudhry_moorad_(2006).jpg" width="136" height="200"></td> <td valign="top" align="left" height="198"> <table border="0" cellspacing="1" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" id="table5"> <tr> <td colspan="3" width="0%"> <p class="book_title">The Credit Default Swap Basis</td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"><img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> <td width="52%" class="book_details_tags" valign="top" height="144" align="left" rowspan="9"> <map name="FPMap2"> <area href="../main/ratings.htm" shape="rect" coords="73, 0, 164, 33"> </map> <img border="0" src="../images_title/choudh14.gif" usemap="#FPMap2" width="202" height="158"></td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" height="32" align="center" width="50%" rowspan="2"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> </table> </td> </tr> </table> </div> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="468" id="table6"> <tr> <td> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> <table border="0" cellpadding="5" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table7"> <tr> <td width="50%" valign="top"> <p align="left" class="body"><strong style="font-weight: 400">This is an excellent, brief introduction to the credit default swap (CDS) basis and related topics. There is background information on credit derivatives and credit spreads—including yield spreads, z-spreads and asset-swap spreads. Most of the book, however, looks at the CDS basis—what factors impact it, why it differs from other credit spreads, how it behaves and how it is traded. </strong></p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="125" align="left" id="table8"> <tr> <td width="120"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td><td width="5"> </td> </tr> </table> <p align="left" class="body"><strong style="font-weight: 400">The book is largely non-technical, although I did spy an integral sign or two. Most quantitative information is communicated with graphs. It is also a very practical book, which uses plenty of Bloomberg screen shots to aide intuition or motivate examples.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">A shortcoming of the book is its brevity. About 50 of its 194 pages are devoted to appendices. Another 50 or so are devote to background information on credit derivatives and bond spreads. That leaves less than 100 pages for a discussion of the CDS basis—and this is a small format book.</strong></p> </td> <td width="50%" valign="top" class="body" rowspan="2"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table9"> <tr> <td width="100%" bgcolor="#333366"> <p class="header_yellow" align="center">Contents</td> </tr> <tr> <td width="100%" class="explanatory_text"> <table border="1" cellpadding="0" cellspacing="5" style="border-collapse: collapse" bordercolor="#CCCCFF" bgcolor="#CCCCFF" width="100%" id="table10"> <tr> <td class="contents_expanded"> <p class="contents" style="margin-top: 5px; margin-bottom: 5px">1. A Primer on Credit Default Swaps </p> <p class="contents" style="margin-top: 5px; margin-bottom: 5px">2. Bond Spreads and Relative Value </p> <p class="contents" style="margin-top: 5px; margin-bottom: 5px">3. The CDS Basis I: The Relationship Between Cash and Synthetic Credit Markets </p> <p class="contents" style="margin-top: 5px; margin-bottom: 5px">4. Supply and Demand and the Credit Default Swap Basis </p> <p class="contents" style="margin-top: 5px; margin-bottom: 5px">5. The CDS Basis II: Further Analysis of the Cash and Synthetic Credit Market Differential </p> <p class="contents" style="margin-top: 5px; margin-bottom: 5px">6. Trading the CDS Basis: Illustrating Positive and Negative Basis Arbitrage Trades</td> </tr> </table> </td> </tr> </table> <p align="left" class="body"><strong style="font-weight: 400">Another problem is a distracted writing style that leaves important concepts hanging. The author just starts talking about CDS spreads without definition. Experienced practitioners won't notice, but students will be lost. Another instance is when Choudhry introduces the iTraxx indexes. Novices are going to be confused when, in the same paragraph, he mentions how the indexes have "high liquidity"—how can an index be liquid? Then he is talking about iTraxx contracts. What contacts—swaps, forwards, futures, options? Experienced practitioners probably won't notice, but novices will be in the dark. There is no discussion of who compiles the iTraxx indexes. For the uninitiated, it is all impossibly vague.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">Despite these modest criticisms, there is plenty of information here. I recommend the book for readers with some familiarity with credit derivatives who want a greater understanding of the CDS basis and related trading practices.</strong><b> [December 22, 2006]</b><p align="center" class="body"> </p> </td> </tr> <tr> <td width="50%" valign="bottom"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table11"> <tr> <td width="100%"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </td> </tr> </table> </td> <td>  </td> </tr> </table> </div> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table12"> <tr> <td width="50%" bgcolor="#FFFFCC" align="center"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" bgcolor="#FFFFCC" id="table13"> <tr> <td> <p class="body" style="margin-bottom: 6; margin-left:10"><b><font color="#333366" size="3">For related books, see sections:</font></b></p> <p class="body" style="margin-bottom: 5; margin-top:5; margin-left:10"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/markets_industries_credit_derivatives.htm">Markets - Credit Derivative, CDO</a></p> <p class="bullet_line_space" style="margin-left: 10"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../topics/financial_engineering_credit_risk.htm">Financial Engineering - Pricing Credit Risk</a></p> <p class="bullet_line_space" style="margin-left: 10"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/other_functions_trading.htm">Other Functions - Trading</a></p> <p class="alternatives_text" style="margin-top:5; margin-bottom:5; margin-left:10"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/portfolio_management_fixed_income.htm">Portfolio Management - Fixed Income</a></p> <p class="alternatives_text" style="margin-top:5; margin-bottom:5; margin-left:10"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/portfolio_management_specialty_strategies.htm">Portfolio Management - Specialty Strategies</a></p> </td> </tr> </table> </td> </tr> </table>  <table border="0" style="border-collapse: collapse" width="100%" cellpadding="0" id="table1" bgcolor="#FFFFFF"> <tr> <td colspan="2" height="12"> <p style="margin-top: 0"> </td> </tr> <tr> <td align="right"> <p align="left" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Ads by Contingency Analysis.</font></a></td> <td align="left"> <p align="right" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Advertise on this site.</font></a></td> </tr> <tr> <td align="center" colspan="2">  <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=iframe" allowtransparency="true" background-color="transparent" style="margin: 0px; padding: 0px; border-width: 0px" width="300" height="250" frameborder="0" marginwidth="0" marginheight="0" scrolling="no"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=300x250;setID=93136"> <img src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=img" border="0" height="250" width="300" alt=""></a> </noscript><![endif]> </iframe>   </td> </tr> </table> <p align="center" style="margin-top: 20"> <map name="FPMap0_I1"> <area href="http://www.riskbook.com" shape="rect" coords="0, 0, 184, 29" target="_top"></map> <img border="0" src="../images/open_book_riskbook.gif" usemap="#FPMap0_I1" width="185" height="30"></p> <p class="a" align="center"><font face="Arial" size="2"><a href="../main/disclaimer.htm">disclaimer</a></font></p> <p class="a" align="center"><span class="verdana10">website:</span> <a target="_top" href="http://www.contingencyanalysis.com"> <font size="2" face="Arial">http://www.contingencyanalysis.com</font></a><br> <span class="verdana10">books direct link:</span> <a target="_top" href="http://www.riskbook.com"><font size="2" face="Arial">http://www.riskbook.com</font></a><br> copyright <font face="Times New Roman">©</font> Contingency Analysis, 1996 - current</p> <p class="a" align="center"><map name="FPMap1_I1"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map><img border="0" src="../images/logo_book_white.gif" usemap="#FPMap1_I1" width="241" height="89"></p>  </body>