Optimizing return on regulatory and economic capital is a key concern for bank portfolio managers. Reducing the capital backing existing holdings can help redeploy the capital to more profitable businesses, shrink the balance sheet, or boost returns.
One obvious way of reducing the capital held is to sell a particular set of assets that are capital-intensive. But these assets tend also to be the ones that yield more and selling them could harm the return on the banks portfolios. CDO technology enables banks to keep most of the returns while significantly reducing regulatory capital.
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Posted in Finance, Strategy
There are several common trading strategies that being used by businessman, those are:
Elementary Portfolio
Selling protection on an index of credit default swap (CDS) is an example of an elementary credit portfolio. For example, the credit index, CDX.NA.IG, consisting of 125 North American credits, will be used to provide sample calculations. The risk-profile for the CDO trades will be compared with risks incurred in simply selling protection on the index.
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Posted in Finance, Strategy
Univariate pricing is a key component to the pricing of structured credit vehicles. To date, credit is still very much an incomplete market. In addition, it is usually difficult to use a simple diffusion setup to model its dynamic, as default risk is usually perceived as an unexpected event, i.e., a jump. An incomplete market and the presence of jumps make the credit space a difficult market, where it is not always easy to derive prices from the cost of related replicating (hedging) strategies/portfolios.
Due to these characteristics, market participants have been trying hard to make the most of two alternatives:
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Posted in Finance, Loan