Asset Swaps vs CDS's

---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 04/05/2001
09:03 AM ---------------------------

Bryan Seyfried
03/30/2001 10:08 AM
To: Vince J Kaminski/HOU/ECT@ECT
cc:
Subject: Asset Swaps vs CDS's

---------------------- Forwarded by Bryan Seyfried/LON/ECT on 30/03/2001
17:12 ---------------------------

Martin McDermott
23/03/2001 18:47
To: John Sherriff/LON/ECT@ECT, Bryan Seyfried/LON/ECT@ECT
cc:

Subject: Asset Swaps vs CDS's

John,

I haven't had much time to put something together on this issue.
Fundamentally both instruments represent the same credit risk, i.e. same
credit events and contingent payments, both represent senior unsecured credit
risk. The differences in pricing therefore arise purely from supply and
demand. One would expect generally that the asset swap would be lower than
the CDS because of liquidity: there are only so many bonds out there, and so
demand for Asset swaps is limited. I am attaching a one page note by JP
morgan where they claim that one of the principal reasons for the CDS to be
more expensive is people hedging convertible bonds by combining (1) a call
option on the equity and (2) a CDS. If the call is cheap they will be
willing to pay more for the CDS, driving the price up. I'll try to
synthesize something more complete next week.

Cheers

Martin