What does this mean?

tanwengkit · September 3rd, 2003, 6:22 am

Most of the credit default swap spreads are priced off asset swap spreads. Hence it is imperative that we know the asset swap spread on an issue that we need to price a credit default swap.

mencey · September 3rd, 2003, 7:40 am

that means that like in every financial product there is an arbitrage relationship between "cash and derivative". there are some differences between CDS and Asset swaps due to legal definition of event / default and other technical details but essentially both have to trade at similar levels because both are exposed to the same underlaying.

FDAXHunter · September 3rd, 2003, 7:42 am

To be precise... the relationship is Offer(CDS) >= Offer(AS) and if short sales are possible on the underlying bond(s) Bid(CDS)<=Bid(AS). However, you will see the later violated quite often, and it's sometimes not easily arbitrageable, as mencey said.

tanwengkit · September 3rd, 2003, 7:54 am

I meant this specifically. The article said that CDS can be priced using Asset swap as a basis, it seems too simplistic, true?What I am trying to do is to understand the how a CDS can be priced, as a start.Highly likely that I may be spouting rubbish, I am new to this but very keen to know more. So, ur help is more appreciated.Refer to the diagram in the following webpage, apologies for the lack of clarity.http://gerardtanwengkit.tripod.com/