|
Default Swaps
|
||||
| Default swaps are derivative contracts in
which one counterparty (the "Buyer" of protection) pays a premium
to a second party (the "Seller" of protection) for taking credit risk
to an issuer or a security (the "Reference Issuer"). If the Reference
Issuer suffers a "credit event," generally an event of default, then
the Seller of protection pays the loss on the Reference Security to
the Buyer. In general the post-credit event payment will either be
an agreement to purchase a bond issued by the specified credit at
par, or a cash payment based on the market value of the Reference
Security at the time of default. Determination of premium paid is
closely linked to asset swap levels on Reference Issuer bonds. Standard
default swap documentation has been established by the International
Swaps and Derivatives Association, Inc. (ISDA). |
|
|
||
| Example: An investor is concerned about the negative news surrounding a Defense Contractor (DC) over the next 5 years, but wants to remain "long" in the name. The investor buys protection from the protection seller at 0.87% per annum for 5 years and would receive par after delivering the bonds to the Seller should there be a credit event involving DC.  This material is being provided for informational purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any product. Structured products are not appropriate for all investors. Clients are advised to make an independent review and reach their own conclusions regarding the economic risks and benefits of any structured transaction and the legal, credit, tax, accounting and other aspects of such transaction in relation to their particular circumstances. The examples provided are based on certain assumptions that may or may not reflect all potential variables that could effect the value of a structured product. This information has been obtained from various sources. Lehman Brothers does not warrant the accuracy, completeness, timeliness, reliability, fitness for a particular purpose or merchantability of this information. |
 |
|||