digital CDOs (fixed recoveries)

aconze · April 20th, 2004, 7:52 am

anyone familiar with hedging digital CDOs (the recoveries are fixed, specified in the contract) ? is there a market liquid enough for digital CDS to hedge against changes in the probability of default only ?

fjahier · May 10th, 2004, 1:56 pm

Interesting topic though

Stefanone · May 10th, 2004, 3:41 pm

There is a market, and in the last issue of CreditFlux I have read that a recovery swap market is emerging...Digital vs. Plain Vanilla CDS are tools you can use for expressing your view on recovery rates..Rgds,S

JabairuStork · May 10th, 2004, 6:53 pm

digital cds and/or recovery rate swaps are not a liquid market yet, but I know of at least two banks making noise that indicates trading may pick up soon.In the absence of a liquid market in recovery instruments, it is possible to construct a statistical hedge for fixed-recovery deals using vanilla cds. If the underlying credits have low prob of default, then the difference is minimal.

Yeren · May 10th, 2004, 7:04 pm

There is a recent artical from derivativeweek (in learning curve section) from Alex Reyfman discussed this topic (about recovery hedge) for the CDO tranches on TRAX/CDX. That may be helpful.Yeren

Money · May 11th, 2004, 4:48 am

do anybody have that DW paper ??