Asset swaps spread level

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. 

CDS prices are often compared to bond asset swap levels in order to gain an initial comparison of the credit quality implied by the market. In fact, differences do exist between the CDS spread and the asset swap spread, even though both spreads may be viewed as compensating the... 

This is the traditional strategy that relies on picking names that are expected to outperform the market. In fund management terms, one selects a diversified portfolio of credits, which ensures that systemic market risk (beta) is hedged away, while the performance of the fund generates excess return, or alpha. Names that are expected to outperform are trading at levels that are cheap, in relative value terms, to their industry or sector class. This is measured by the asset swap spread or ASW, as we observed earlier. 

However, a critical issue on this spread measure is how the asset swap has been stmctured. ASW measure works very well when bond prices trade at or near to par. Most corporate bonds trade with price away from the par (as in this case), thus making the ASW an inaccurate spread measure. If the bond trades at premium, the ASW spread will overestimate the level of credit risk conversely, if the bond trades at discount the ASW spread will underestimate the level of credit risk. Therefore, in the case of HERIM and TKAAV, the ASW spread overestimates the credit risk associated with the bonds because both trade significantly at premium. 

A credit default swap (CDS) price provides fundamental credit risk information of a specific reference entity or asset. As explained before, asset swaps are used to transform the cash flows of a corporate bond for interest rate hedging purpose. Since the asset swaps are priced at a spread over the interbank rate, the ASW spread is the credit risk of the same one. However, market evidence shows that credit default swaps trade at a different level to asset swaps due to technical... 

However, it is also possible that an investor may find that there is a negative basis. For example, the credit default swap spread is less than the asset swap level for a cash instrument issued by the same reference entity. This situation may arise in the markets ... 

Long credit risk (i.e., long the bond risk) Short credit risk (i.e., short the bond risk) CDS spread is higher than the asset swap level CDS spread is lower than the asset swap level Long asset and long protection Short asset and short protection Long-credit risk Short-credit risk... 

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