Crisis in Credit Derivatives is Averted

February 7, 2007: The United States Court of Appeals for the Second Circuit overturned the 2006 district court ruling on the credit derivative contract between Aon Financial Products and Société Générale.

Mon Ami ISDA: Crisis in Credit Derivatives (Commentary)
LIPPER HedgeWorld (Reuters) Monday, May 22, 2006

By Janet Tavakoli

One might take a guess that Aon intended to hedge its risk in the Bear Stearns transaction by entering into a contract with Soc Gen. If so, it did exactly that. It hedged; it did not engage in an arbitrage. The hedge had basis risk, presumably the only reason it would make any economic sense in the first place. A hedge is not an arbitrage, and when hedgers take basis risk, they must bear that risk.


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