Asset swaps package

As shown in Eigures 1.4 and 1.5, with this swap structuring, the asset-swap spread for HERIM is 39.5 bp and for TKAAV is 39.1 bp. These represent the spreads that will be received if each bond is purchased as an asset-swap package. In other words, the ASW spread provides a measure of the difference between the market price of the bond and the value of the cash flows evaluated using zero-coupon rates. 

An example would be that a protection buyer holding a fixed-rate risky bond and wishes to hedge the credit risk of this position via a credit default swap. However, by means of an asset swap the protection seller (e.g., a bank) will agree to pay the protection buyer LIBOR +/-spread in return for the cash flows of the risky bond. In this way the protection buyer (investor) may be able to explicitly finance the credit default swap premium from the asset swap spread income if there is a negative basis between them. If the asset swap was terminated, it is common for the buyer of the asset swap package to take the unwind cost of the interest rate swap. 

If the investor is exposed to the unwind cost of the interest rate swap in a standard asset swap package in the event of default. This risk may canse investors to require a higher asset swap spread level to compensate them for this risk. 

FIGURE 19.3 shows the Bloomberg screen ASW for a GBP-denomi-nated bond, GKN Holdings 7 percent 2012, as of August 10, 2005- We see that the asset-swap spread is 121.5 basis points. This is the spread over LIBOR that will be received if the bond is purchased in an asset-swap package. In essence, the asset swap spread measures a difference between the... 

The spread of the floating coupon over the bond s market price, that is the asset-swap value is the difference between the bond s market price and par. The package of the asset swap is structured in two phases ... 

An asset swap is a package that combines an interest-rate swap with a cash bond, the effect of the combined package being able to transform the interest-rate basis of the bond. Typically, a fixed-rate bond will be combined with an interest-rate swap in which the bond holder pays fixed coupon and received floating coupon. The floating coupon will be a spread over LIBOR (see Choudhry et al. 2001). This spread is the asset-swap spread and is a function of the credit risk of the bond over and above interbank credit risk. Asset swaps may be transacted at par or at the bond s market price, usually par. This means that the asset swap value is made up of the difference between the bond s market price and par, as well as the difference between the bond coupon and the swap flxed rate. 

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