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.
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.
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.
Contents
1. A
Primer on Credit Default Swaps
2.
Bond Spreads and Relative Value
3.
The CDS Basis I: The Relationship Between Cash and Synthetic Credit
Markets
4.
Supply and Demand and the Credit Default Swap Basis
5.
The CDS Basis II: Further Analysis of the Cash and Synthetic Credit
Market Differential
6.
Trading the CDS Basis: Illustrating Positive and Negative Basis
Arbitrage Trades
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.
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. [December
22, 2006]
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