Muni Recovery Rate Change Could Lead To Arb

Apr 10, 2012 - Kevin Dugan

Read More: Citigroup·

Differences in recovery rates between old and new U.S. municipal credit default swap contracts, where the old rates are implied and the new rates are fixed in the contract, could lead to arbitrage should two firms disagree on the implied rate of recovery in the event of a default.

“A potential disconnect or a difference in opinion regarding recovery rates can lead to arbitrage trades,” said Vikram Rai, credit strategist at Citigroup in New York. He said an end user could buy protection on a name if the firm thinks that the rate of recovery will be lower than the assumed or contract....

Access to this content is restriced for Derivatives Intelligence subscribers.
To access the full service, please log in, subscribe or take a free trial.

Free Trial

Not ready to subscribe?
Register today for a free trial.

Free Trial

Latest Community

Jul 05, 2012 - Robert McGlinchey

In Defense Of Tucker

Prior to Bob Diamond’s U.K. Treasury Select Committee hearing on the firm’s manipulation of Libor, commentators alluded to the impact Diamond’s comments would have on the integrity and career of Paul Tucker, deputy governor, financial stability at the Bank of England. Yet, Diamond’s comments were never in doubt.
May 24, 2012 - Robert McGlinchey

Dimon’s Status As Top Lobbyist Dampens Gloating

You would have thought that news of USD2 billion in losses incurred by JPMorgan’s chief investment office from trading in indices tied to credit default swaps would have fuelled some schadenfreude among the firm’s competitors, but among senior market observers that has not been the sentiment in recent weeks.
May 21, 2012 - Kevin Dugan

In Search Of German Yields: Sell Synthetic

Selling five-year credit default swaps on Germany brings greater yield than buying cash bonds because the CDS spread is skewed wider on European sovereign risk, according to a report by Munich-based Assenagon Capital Management.