Credit Derivatives

CREDIT DERIVATIVES 26 September 2006 Version: 2.01 Author: Peter Jones

©2003 Bloomberg L.P. All rights reserved.

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For 24 hour global customer support call +1 212 318 2000, +44 20 7330 7500, +65 6212 1000, +81 3 3201 8900 or press the HELP key twice on the BLOOMBERG PROFESSIONAL® service.

Swap to Bloomberg…For all your credit derivatives

“Credit default swaps are becoming the most important instrument I’ve seen in decades” said former Federal Reserve Chairman Alan Greenspan at a Bond Market Association conference in New York, May 18 2006. Credit derivatives are the fastest growing part of the $298 trillion over-the-counter derivatives market. The International Swaps and Derivatives Association (ISDA) reported that the credit derivatives market has more than doubled in size in the past year to $26 trillion. The BLOOMBERG Professional® service provides you with all you need to create, store, value and manage your credit derivatives: NEWS

Live broadcasts and breaking news stories. Archived news and multi-media reports.

DATA

Markit RED™ – Markit’s Reference Entity Database of legal entity names, preferred reference obligations and RED CLIP codes.

iTraxx, iBoxx, Dow Jones CDX, TRAC-X and other index products. PRICING

10,000 CDS spreads. 1,500 reference entities. 70 pricing sources. Bloomberg Generic Price source – an average of all available providers.

ANALYTICS

JPMorgan single-name credit default swap calculator. Morgan Stanley basket default swap pricing calculator.

ELECTRONIC TRADING

7 live ET providers. Quick, easy and efficient trading and ticket generation.

TRADE AFFIRMATION

T-Zero platform ensures 100% accuracy of trade capture on trade date. ORDER MANAGEMENT

Customized and integrated order management reports and monitors.

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The BLOOMBERG Professional®

Credit where it's due Bloomberg is a global, multimedia-based distributor of information services, combining news, data and analysis for global financial markets and businesses. Bloomberg provides real-time pricing, data, history, analytics and electronic communications 24 hours a day, 365 days a year and is used by over 300,000 financial professionals in 125 countries world-wide. Bloomberg has established a unique position within the financial services industry by providing a broad range of features, combining information and unique analytical capabilities, in a single package. The BLOOMBERG Professional® service is the definitive source of real-time and indicative data for all securities, statistics and indices, and of research covering all key global securities markets. If you would like further information on all the new credit derivatives functionality now available on the BLOOMBERG Professional® service, please contact your Bloomberg representative and ask them to arrange an appointment. If you are not a Bloomberg customer, please contact a Bloomberg office to arrange a demonstration:

London +44-20-7330-7500; New York +1-212-318-2000; Tokyo +81-3-3201-8900.

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Customized Real-Time Monitors Monitor prices, news, graphs – all in one place, all at one glance

SEE ALL THE KEY CDS PRICES AND DATA – WHERE YOU NEED IT, WHEN YOU NEED IT, HOW YOU NEED IT

Build tailor-made BLOOMBERG Launchpad views including co-mingled contributor pages of live CDS quotes; real-time mark-to-market monitors; technical analysis studies; customized calendars of economic releases, government and central bank announcements; key news on credit derivatives; live TV broadcasts, and much more. Store different Launchpad views and share them with your colleagues.

Use BLOOMBERG Launchpad to free up your main screens from the task of monitoring so that you can maximise the resources you dedicate to sophisticated analytical functions.


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Credit Derivatives News Access all the news you can use - any time, any place, any how

READ THE NEWS THAT MAKES AND BREAKS THE MARKET MOVEMENTS

Keep on top of all the latest news, views and opinions that impact the markets. Live TV broadcasts, breaking news stories, archived multi-media reports and real-time illustrations put the news in perspective so that you have all the information you need to make your decisions.

Access news, monitors, quotes and messages from your phone, Blackberry, Palm or Win CE/Pocket PC device so that you can keep in touch with what’s important for your job – any time, any place, any how.


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Company Credit Analysis Anticipate any potential problems before they happen

ASSESS THE DANGER OF A COMPANY GOING INTO DEFAULT

View the distribution of a company’s debt and loan structure, so that you can anticipate any future re-financing problems and decide if and when it is in danger of default.

Use sophisticated models to assess the financial health and outlook of a company, and estimate the one-year probability of default, so you can more accurately gauge the relevant credit quality of a reference entity.


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Credit Relative Value Co-mingle news with equity, debt and credit derivatives data

GRAPH Z-SPREADS RELATIVE TO AN ISSUER CDS CURVE

Select a specific reference entity and view a summary of all the key equity information for the issuer, and all the latest stories to affect the company displayed on a scrolling news panel.

Plot the z-spreads for the company’s outstanding bonds against the underlying issuer CDS curve, using your preferred pricing sources. Add bonds issued by other companies for comparison.

Monitor bond spreads relative to the appropriate benchmark issues,

track the swap market z-spreads and calculate each bond’s CDS basis so that you can assess the relative value of an issuer’s bonds in relation to its reference CDS curve.


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Market Contributors Compare quotes from all the main providers

CHECK OUT DIFFERENT CDS CONTRIBUTORS’ BID AND ASK QUOTES Examine the selection of different CDS contributors and call up their

home pages. If you find you don’t have permission to see a particular provider’s quotes, just use the contact details they give you on their page so that you can ask them for access privileges.

Select a specific CDS for a reference entity and compare all the spread quotes you have permission to see on one screen so that you can determine which provider gives the best value.


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CDS Bloomberg Generic Prices Use intraday prices based on all available price contributors

COMBINE INTRADAY PRICING WITH COMPREHENSIVE HISTORICAL DATA Bloomberg Generic Average Prices are based on all the contributor

prices available on the BLOOMBERG Professional® service – not just those that a particular subscriber can access. They are the same for all customers irrespective of their individual accessing privileges.

Choose from six available Bloomberg Generic Average Price sources –

for each of three regions there is an intraday price with end-of-day marked at 6pm local time in London and New York and 8pm Tokyo. Each region also has historical prices taken at 5:15pm local time.


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CDS Defaults Choose the default settings for all your credit derivatives deals

PERSONALIZE ALL YOUR CDS DEFAULT SETTINGS

Set up your CDS spread curve defaults; interpolation method; date generation; spread curve currency overrides, and CDS valuation model.

Choose your default pricing sources for individual reference entities or for different combinations of currency, market sector and debt type.


Use live IRS curves to mark-to-market your CDS trades, or lock-down the swap curve using end-of-day fixings so that the trading desk and back office can base their valuations on common input assumptions.

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Reference Entities List Combine the BLOOMBERG Professional® with Markit RED™

SEE ALL THE KEY MARKIT RED™ INFORMATION YOU NEED TO TRADE Access Markit RED™ on the Bloomberg platform. The BLOOMBERG

Professional® service carries the entire Markit Reference Entity Database of audited, accurate, legal reference entity names, reference obligations and CLIP codes and is updated daily.

View the list of expired RED pair codes. Keep track of expired RED

reference entities and their associated Bloomberg company names together with the last dates on which they were valid. Check on any changes to the mapping of Bloomberg company names to RED codes.


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World CDS Prices Check which names have moved the most

GET AN OVERVIEW OF THE CREDITS YOU FOLLOW – CUSTOMIZED BY CURRENCY, SECTOR AND TERM

Click on any reference entity so that you can access and update its complete CDS spread curve. Select a specific CDS mnemonic and use the drop-down menus to view its description, spread history and price quotes – from all sources you have permission to see.

Focus on a single term, or compare spreads across the CDS curve. Sort the reference names by time of last update, CDS spread, or end-of-day change – either by absolute value or percentage change so that you can see which credits have been the most active.

Use CDS Bloomberg Generic Average Prices – prices based on all CDS contributors not just those you have permission to see, so that you can be confident of seeing independent, reliable results.


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Single-Name Credit Default Swaps Create, store and value your CDS deals

CHOOSE THE CDS MODEL YOU PREFER WITH THE PRICE SOURCE YOU FIND MOST RELIABLE

Value your single-name and index credit default swaps with the market’s benchmark calculator-of-choice. Combine the widely-used JPMorgan valuation model, the industry standard reference data of Markit RED, and the CDS curve from your preferred price contributor so that you can trade with confidence – easily, effectively and efficiently.

Search on the name of a company, parent or subsidiary and find the

correct associated RED reference entity/obligations so that you can save the most appropriate RED pair code for your deal.

Send copies of your CDS deals to your counter-parties using the secure Bloomberg messaging system so that you can confirm all the details of your trades. Mark-to-market your credit default swaps; transform the CDS spread curves; check the market values for given deal spreads.


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Amortizing CDS Value credit default swaps on amortizing assets

PRICE CDS ON SINKABLE BONDS, ABS, MBS DERIVATIVES AND AMORTIZING LOANS

Calculate the market value, cashflow payments and optimal hedge within the credit derivatives market for an amortizing security. Determine the difference in market value due to the asset’s amortization features.

Value credit derivatives based on baskets of amortizing loans or MBSs.

Incorporate your own prepayment assumptions and customize the amortization schedule – or import a schedule from Excel.


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Basket Default Swaps Create, store and value nth-to-default basket swaps

EVALUATE CREDIT PROTECTION ON A GROUP OF NAMES

Choose whether the payout is triggered by the first, second or subsequent credit event (1st-to-default, 2nd-to-default, etc).

Use flat correlations, recovery rates and spreads or input your own

values. Select either the market-standard Gaussian copula or Clayton copula to estimate cross-relationships between the basket constituents.

Calculate the market value of a basket default swap of up to 20 names,

and determine how sensitive it is to changes in the deal spread. For 24 hour global customer support call +1 212 318 2000, +44 20 7330 7500, +65 6212 1000, +81 3 3201 8900 or press the HELP key twice on the BLOOMBERG PROFESSIONAL® service.

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Synthetic CDOs Value loss or notional basket default swaps

EVALUATE BASKET DEFAULT SWAPS OR SYNTHETIC CDO’S

Use the Morgan Stanley Basket Default Pricer to value notional (nth-to-default) or loss (tranched) structures of up to 150 reference entities.

Determine the cost of protection from attachment to detachment points

of a synthetic CDO or a CDS index.


Calculate the partial deltas and hedge amounts then export to a Microsoft® Excel spreadsheet at the click of a button.

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Credit Default Swaptions Price options on CDS indices

VALUE CREDIT DEFAULT SWAPTIONS FAIRLY AND INDEPENDENTLY

Use independent analytics based on the widely-used Black option model to value your credit default swaptions on CDS single names or indices. Combine Bloomberg’s proven market-standard Credit Default Swap calculator and the benchmark JPMorgan CDS model to value the underlying CDS index.

Calculate either the option premium or the volatility, together with the

swaption’s delta, gamma and vega. Determine the value and sensitivity of the underlying CDS index together with its at-the-money forward rate.


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Credit Derivatives Deal Search Search, sort and manage all your credit derivatives deals

USE THE CONTEXTUAL SEARCH FUNCTIONALITY TO FIND THE DEALS YOU NEED – QUICKLY, EASILY AND EFFICIENTLY

Search for all the credit derivative trades created by you or others in your firm, or focus on particular deal types: single name credit default swaps; basket default swaps; synthetic CDO tranches, or options on a CDS or an index.

Identify all the trades you have open with a specific counterparty, or on a

given reference entity so that you can better manage your risk exposure.


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CDS Indices Track the levels of different CDS Indices

PRICE, GRAPH AND ANALYSE CDS INDICES

Access contributor pages of CDS indices. Check quotes and correlations for tranched products and first-to-default baskets.

View, graph and compare the different series of CDS indices and sub-

sectors – including generics that combine the prices of previous series.

Select any CDS index, view the constituents, see the list of available price contributors and value index trades.


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Trade Execution Trade over the world’s first dealer-to-customer CDS ET platform

TRADE ELECTRONICALLY WITH YOUR PREFERRED CDS DEALER

Trade single-name CDS and CDS indices electronically on the BLOOMBERG Professional® service. Access multiple products and dealers in real-time, view executable price levels, and make price comparisons.

Use the Bloomberg CDS Electronic Trading System to effect transactions between your organisation and single-dealer ET providers.


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Trade Capture Generate trade tickets that capture all the information you need

CONFIRM ALL YOUR ET TRADES WITH MAXIMUM EFFICIENCY

Execute a trade easily and quickly with a minimum of keystrokes.

Generate CDS order details that incorporate the Markit RED legal reference entity name, preferred reference obligation and CLIP code that uniquely ties the entity to the obligation.


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T-Zero Trade Affirmation Ensure your CDS trade data is 100% accurate and timely

MINIMIZE YOUR OPERATIONAL AND REGULATORY RISKS AND MEET NOVATION PROTOCOL REQUIREMENTS

Access the T-Zero Credit Derivatives Affirmation platform through the Bloomberg Terminal so that you can accurately capture and communicate trade data.

Affirm your trades prior to processing so all the key economic details of

the trade including allocations, reference entity, payment dates etc are agreed among all parties to the trade immediately after execution.

Deliver trade data electronically to virtually any downstream system and

market service provider including DTCC Deriv/SERV, GlobeOp, Calypso and Thunderhead. For more information about T-Zero, visit www.tzero.com.


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Order Management and Risk Analysis Combine electronic execution with sophisticated trade analysis

BUILD FULLY CUSTOMIZED TRADING WORKSHEETS TO MANAGE YOUR POSITIONS AND EXPOSURE

Generate a real-time monitoring, ticketing and pricing tool that also reports buy and sell orders made to your book.

Create customized worksheets that display risk values classified by currency, department, trader book, country, sector, sub-sector, ratings, and security so that you can manage your firm's yield curve exposure.


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FAQ Sheet Find answers to the frequently asked questions

Can I access Markit RED™ information free of charge? Yes – Bloomberg offers Markit RED data at no additional cost to users of the core BLOOMBERG Professional® service, for use within the terminal and through our API. However, for transaction processing, such as confirming trades through DTCC and SwapsWire, users must subscribe to Markit’s RED. The Reference Entities List provides a mapping of Bloomberg company names and Markit RED data.

REDL<GO>

What are the differences between the asset swap spread and the z-spread? The Asset Swap Calculator, ASW, shows a bond’s asset swap spread and its z-spread. These spreads compare the gross price of a bond to its net present value (NPV) in the swaps market. The asset swap spread is an annuity expressed in basis points; the NPV of this plus the gross price of the bond equals the NPV of the bond’s cash-flows. The z-spread is a constant number of basis points added to each implied zero swap rate; the NPV of the bond’s cash-flows discounted using this adjusted “credit” curve equals the bond’s total price. When spreads are small, the asset swap spread and the z-spread are close. The spreads diverge for bonds from weaker credits, with the z-spread tending to be the higher. The z-spread is better for estimating CDS relative values.

HELP ASW<GO>2<GO>7<GO>

What is the CDS basis? Calculated bond spreads are different from the reference entity’s quoted CDS spreads. The CDS basis is the CDS spread minus the z-spread. If the CDS spread is wider than the asset swap spread, the basis is positive; if it is tighter than the asset swap spread, the basis is negative. You can calculate the basis using the Custom Index Expression, CIX.

CIX<GO>

Where can I see contributed CDS prices? Use the function MRKT to access all current market contributors’ CDS spreads. If you want to be enabled to see a particular contributor’s prices, contact the provider directly using the information on their screen. To see all the dealers offering electronic trading on the BLOOMBERG Professional® platform, use ET.

MRKT<GO> ET<GO>

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FAQ Sheet Find answers to the frequently asked questions

How can I find the CDS tickers for a reference entity? Call up the CDS tickers for the names on any CDS contributor page by pressing the <TAB> key (this also gives you the information you need to add the contributor page to a Launchpad view). Access the CDS tickers for a given reference entity from the Description Page, DES, for any of its bonds. Search for CDS tickers or reference entities using CDSD. Use the CDS monitor, WCDS.

TELEFO4.5 09<CORP>DES<GO>

How can I see the price quotes for a particular CDS? For a particular CDS or CDS index ticker, the All Quotes function, ALLQ, shows price quotes from all the contributors that have given you access to their data.

CTLFOE3<CURNCY>ALLQ<GO>

What is the CDS Bloomberg Generic Average Price? The Bloomberg Generic Average is the mean of all contributor prices that have updated during the day, excluding the highest and lowest prices. It is the same for all customers irrespective of which contributors they can access. For each of three regions (London, New York and Tokyo) there is a Bloomberg Generic Average snapshot price taken at 5:15pm local time, and an intraday price (end-of-day marked at 6pm in London, 6pm New York and 8pm Tokyo). Can I choose which CDS spreads to use? Yes. Use CDSD to select your favourite contributors for a particular currency, market sector, debt type or individual issuer; combine contributed quotes with user-defined spreads; choose which method to use for spread curve interpolation. You can also append a specific CDS pricing contributor’s mnemonic to the CDS ticker if you want to use their spreads – either within the environment of the BLOOMBERG Professional® service or within a spreadsheet.

CDSD<GO> CTLFOE5 CBIL<CURNCY><GO>

Can I store and mark-to-market my CDS trades? Yes. Use the CDS pricing calculator, CDSW, to create and store your CDS deals. Select which pricing model you want to use – the JP Morgan model or the Modified Hull-White model (See Appendices I and II) – and choose the price source you prefer (see above). Mark-to-market your CDS deals individually using CDSW, as a group within the portfolio system, or within Launchpad.

CTLFOE3<CURNCY>CDSW<GO>

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Appendix I The JPMorgan Credit Default Swap Model


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Appendix II The Modified Hull-White Credit Default Swap Model

Appendix II For 24 hour global customer support call +1 212 318 2000, +44 20 7330 7500, +65 6212 1000, +81 3 3201 8900 or press the HELP key twice on the BLOOMBERG PROFESSIONAL® service.

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The Modified Hull-White Credit Default Swap Model


Documents

Credit Derivatives