Why dont u just shock the stock price 1% with a constant asset vol...note the effect on the Spread...convert that spread effect into CDS equivalent % points...then the ratio of CDS% movement to 1% = delta

<t>Incidentally,I recently heard of people hedging the Equity Tranche of a CDO with equity products, ie Stock,Puts etcThis seems precariously dangerous to me...you have now added credit/equity correlation basis to credit/credit correlation riskDo you think there is an opp here? Think the rationale i...

thanks very much schonbucher and jarod...as supected i was under the misconception that E2C was backing out approximate yield spreads over libor, which explains why i started seeing odd behaviour with spreads > 1,000bps!

i was using a 3% coupon...but even using 5% coupoun, T=5, & yield of 3.85%+73% = 76.85% i get a price of 1053 gives yield more like 20.5%...?!?!?

<t>HelloI have been stressing the creditgrades model recently and am confused by an odd phenomenon i noticed at a certain extremeSayS=0.5Debt P share = 10AssetVol = 50%, T=5 and L=3.85%using the standard Rec% = 50% and Lamda of 30%, I get a CDS spread of 7,300bps, which implies a bond price of about...

200+, now that is diversified!

<t>Just a quick comment on CDS V Equity 'noise' being ironed out over time through managing a large portfolio of these trades...Seems to me that from 1998 to early 2000, Equity valuations in the European Telco universe rallied with the rest of the equity bubble seen around the globe, but credit spre...

someone mentioned using merton to de-lever equity options of differing strikes...by this i assume u mean u know what the vol for an ATM option should be...then how would one imply what the vol for the 50% strike should be using solely leverage effects to explain the skew?

<t>hello all,i was wondering if anyone had any enlightening insights on the following;assume an issuer has bonds of the same ranking, currency and similar coupons that mature in 5 years and 20 years (no calls or puts etc)The 5 year spread to Libor is 500bps (credit protection is offered at the same ...

<t>do you think that creditgrades model provides a more accurate answer? seems they have incorporated jumps by fudging the model with a stochastic default barrier...(also if anyone has that model in excel it would be greatly appreciated...asked one of our quants to whip it up 2 months ago and nothin...

<t>the other beauty of these models is that they allow one to model a theoretical term structure of credit spreads for bonds of differrnt maturitesit is widely acknowledged that credit curves invert as an issuer becomes more distressed. using merton allows you to get a feel for when this should happ...

Sorry, must have sent this at the same time as Johnny's much more thorough analysis!

<t>Well considering N(D1) is delta, it describes a change in Equity Value for a Change in Asset Value and rearranging the terms as follows...N(D1) = [Equity Vol * Equity Value]/[Asset Vol * Asset Value]It seems clearer where the relationship comes from. This assumes a correlation of 1 between asset ...

When using BS to price value of stock from asset value and asset vol he relatioship is generally modelled as follows;Equity Vol = Asset Vol * N(D1) *Asset Value/Equity Value

...all i meant was say day 1 you held a stock position in Jazztel because you are bullish on the general story...day 2 you figure out that the bonds are actually a much cheaper way of playing in the name...so you sell your stock and buy the bonds instead