I'm looking for any literature on recovery rate swaps and would really appreciate it anybody could point me in the right direction.

Don't think anyone does them... however, you can construct one using a digital and a vanilla default swap. But maybe I've got the wrong understanding of what you mean by recovery rate swap...

Complexity, I think you're on the right track. There are some recovery rate swap deals being done, mostly of course among the larger banks and writers of CDS contracts. What I'm looking for, and I really appreciate your answer, is some sort of methodology or a point in the right direction to finding a price for said swaps. They are no premium swaps where one side takes a fixed recovery and the other takes on the floating recovery rate associated with a credit (CDS usually). I'm in the process of working on a project to gain some traction in this nascent market but it's proving a bit difficult to find others in the field with much of any knowledge. My other thought is that recovery rate swaps might also cover EDS, but in that case it seems more intuitive and cost effective to use a long put strategy for the writer of the EDS. Any thoughts? VR,Beatarmy96

As far as I can see, recovery rate swaps are only done as a par package consisting of a CDS and DDS (e.g. under two separate confirms). They are fairly straight forward to construct given a CDS and DDS spread. Fix the CDS notional and choose the DDS notional such that the premium legs offset. That way, you get a par package with payout only at default.An EDS is just a portfolio of equity options offered to investors at ridiculous prices, so there's nothing new to this product...You might also see a different type of recovery rate swap: swapping contracted recovery with final recovery.

Thanks for the info, Complexity. I'm embarrassed to ask this question but what is a DDS? I think once I understand that I can fix the notionals for each leg to offset. The different type of RRS you mentioned is I think though what I'm trying to construct. The product should contract one party to a fixed recovery rate (shedding their risk in writing in a CDS) and the other to the final recovery rate (floating leg) with the trade being a no premium swap.On a separate note, have you ever thought about trying to relate CDS and EDS? I know it's credit vs equity markets but given that the KMV model uses equity characteristics to model debt, is there not a way to relate the two? It sounds a bit ridiculous but if there is a relationship I think it might be interesting to find out what it is. Thanks again for the help.

DDS = Digital Default Swap i.e. a default swap with a fixed recovery rate => payout in default is know at trade inception.Of course, there is some relationship between debt and equity value. Not very useful for (most) investment grade stuff though. As I mentioned before, EDS are just a marketing trick. You can perfectly replicate EDS using equity options. Do a search for capital structure arbitrage to find out how to leverage the debt/equity relationship.

Hi,I was also looking for information on recovery swaps. I believe that the Recovery Swaps were introduced by BNP Paribas to reduce uncertainty of default for investors. In today's FT there is a small article. They explain that in "February BNP started selling fixed-rate recovery CDOs and realised that recovery swap would be a way of offloading the risk. It looks like the first swap customers have been hedge funds". Related to the CDS and EDS topic I agree that EDS it's just a marketing trick but it's a good one. There are plenty of funds looking for higher yields that might be interested in EDS but will never look at equity options strategies. I'm sure that hedge funds and major banks will take advantage soon. I think that the way forward is to combine a CDS/EDS and a REcovery Swap. What do you think ? (ie. buy protection on GlaxoSmithkline at 6bps, sell EDS at 91bps and try to get a a recovery swap for the CDS protection sold)

ramonpons,If you want to bet on the equity credit relationship, you can do it without EDS. If you can find someone who buys your EDS for an outragoius price, you can hedge it and pocket the difference.Obviously, if you want to take a view and you can find someone to buy your EDS, you might not want to hedge it (e.g. pay CDS against EDS etc.). But that just looks like a combination of strategies to me. Bottom line, EDS are only usefull to rip off investors who either don't understand the product or are restricted to trade in equity options.

Can someone explain to me the relation of a recovery swap and CDS and how it can be constructed? I'm having trouble putting it together.