Customer Reviews

CDS Delivery Option: Better Pricing of Credit Default Swaps (Bloomberg Financial)

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needless editorial on the cause of the financial crisis. Covered ad infinitum and ad nauseam in newspapers, books, magazines, and blogs and blogs...

what is missing was focus on credit default swaps! for some reason i thought if the title had both CDS and Credit Default Swaps, it would be almost all about CDS. Not quite.

The delivery options in the Treasury market are well known (you can choose amongst many bonds that have different net basis and implied repos) and the fact that there is a couple of hours of lag in the futures market closing and the selection of the delivery of the actual bond blah blah blah. I was looking to be educated about the authors real views on the credit market auction process, triggers by protection buyers vs protection sellers, any issues around new protocols etc.

it comes through that the book is by a rates guy looking at the credit markets with a binocular

This book covers a lot of different topics, but a convincing paradigm for better pricing of credit default swaps is not one of them. The overall organization is unfocused and appears pointless. Boberski touches on the current financial crisis, how the cheapest-to-deliver option works in treasury futures, factors to consider in designing a new CDS contract, and an attempt to apply the framework of treasury future cheapest-to-deliver to corporate CDS. This framework appears hypothetical a best, and an illusion at worst. If you're looking for an analysis of the roots of the current crisis, there are better books out there: like Morris' The Trillion Dollar Meltdown or Cooper's The Origin of Financial Crises. I admire the author's attempt to apply the delivery option to corporate bonds, but I don't think it works.

Well, it's a few months into 2009, after the financial meltdowns of 2008. This is one of the recent books that recaps the events of 2008 and preceding years. It looks at one crucial component that caused so much grief, and is still doing so. Credit Default Swaps. The text gives a good summary of the US housing market and how low interest rates set by the Federal Reserve after 2001 helped propel housing prices. The book argues that the Fed should have raised interest rates far earlier, rather than providing liquidity that helped gin up a historic rise in housing prices and an unfolding and equally historic collapse.

As to the specifics about the CDS delivery option, these are perhaps best meant for professionals in the field. But much of the first half of the book can be read for a good explanation of the current mess we are all in.

The book has a curious omission. It talks about several large firms, Fannie Mae, Bear Stearns, Lehman and others. But nothing about AIG. Yet it now appears that AIG's writing of CDS was perhaps the most extensive of all firms. And the continuing deterioration of CDS prices is leading to even more massive losses for AIG. Why no mention of AIG?