Cracking Correlation
Credit default swaps
Credit
Risk Magazine - July 2003 - Volume 16/No7
By
Navroz Patel
Collateralisation
is an increasingly common way to help mitigate counterparty
credit
risk in CDS trades, although
it appears
to be marginally less common in Europe – especially
when trading with smaller banks. Dealers say
some smaller institutions’ trading
desks are not allowed to post collateral on CDS
trades. And even those that can post collateral
may face infrastructure limitations. Janet Tavakoli, founder
of a Chicago-based structured finance consulting
firm and former head of capital
markets
financial engineering at Westdeutsche
Landesbank (WestLB), says: “Some European
banks don’t
have collateral and exposure tracking systems
set up.” "There
are currently four major data sets used to estimate correlation
using various types of models: equity prices, cash market
credit spreads,
credit default swap credit
spreads, and default - based data. Besides correlation between
reference entities and counterparties, there is also correlation
between loss given default and the probability of default," Tavakoli
adds.
END
OF EXCERPT
Janet Tavakoli is
the president of Tavakoli Structured Finance,
a Chicago-based firm that provides consulting
to financial institutions and institutional investors.
Ms. Tavakoli has more than 20 years of experience
in senior investment banking positions, trading,
structuring and marketing structured financial
products. She is a former adjunct professor of
derivatives at the University of Chicago's Graduate
School of Business. She is the author of: Credit
Derivatives & Synthetic Structures (John
Wiley & Sons, 1998, 2001), Structured
Finance & Collateralized Debt Obligations (John
Wiley & Sons, 2008).
Janet Tavakoli's
book on the global financial meltdown is Dear
Mr. Buffett: What An Investor Learns 1,269 Miles From Wall
Street (Wiley 2009).
Clients of Tavakoli Structured Finance have the benefit of proprietary consultation,
which is not available in any other paid or public forum. Clients also commission
proprietary research and analysis.
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