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Lehman Exotic Credit Derivatives

Lehman Exotic Credit Derivatives

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Published by: Equity Private on Nov 22, 2013
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THE LEHMAN BROTHERS

GUIDE TO EXOTIC CREDIT DERIVATIVES

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lehman cover.qxd 10/10/2003 11:03 Page 1

Effective Structured Credit
Solutions for our Clients

With over seventy professionals
worldwide,Lehman Brothers gives you
access to top quality risk-management,
structuring,research and legal
expertise in structured credit.The team
combines local market knowledge with
global co-ordinated expertise.

Lehman Brothers has designed specific
solutions to our clients’problems,
including yield-enhancement,capital
relief,portfolio optimisation,complex
hedging and asset-liability
management.
.Credit Default Swaps
.Portfolio Swaps
.Credit Index Products
.Repackagings
.Default Baskets
.Secondary CDO trading
.Customised CDO tranches
.Default swaptions
.Credit hybrids

For further information please contact
your local sales representative or call:

London:

Giancarlo Saronne

+44 20 7260 2745 gsaronne@lehman.com

New York:Mike Glover

+1 212 526 7090

mglover@lehman.com

Tokyo:

Jawahar Chirimar

81-3-5571-7257 jchirima@lehman.com

Structured Credit Solutions

Product Innovation

All Rights Reserved.Member SIPC.Lehman Brothers International (Europe) is regulated by the Financial Services Authority.©2003 Lehman Brothers Inc.

Leadership in Fixed Income
Research

Document1 06/10/2003 09:54 Page 1

The Lehman Brothers Guide to Exotic Credit Derivatives 1

The credit derivatives market has revolu-
tionised the transfer of credit risk. Its impact
has been borne out by its significant growth
which has currently achieved a market notion-
al close to $2 trillion. While not directly com-
parable, it is worth noting that the total
notional outstanding of global investment
grade corporate bond issuance currently
stands at $3.1 trillion.
This growth in the credit derivatives market
has been driven by an increasing realisation
of the advantages credit derivatives possess
over the cash alternative, plus the many new
possibilities they present to both credit
investors and hedgers. Those investors seek-
ing diversification, yield pickup or new ways
to take an exposure to credit are increasingly
turning towards the credit derivatives market.
The primary purpose of credit derivatives is
to enable the efficient transfer and repack-
aging of credit risk. In their simplest form,
credit derivatives provide a more efficient
way to replicate in a derivative format the
credit risks that would otherwise exist in a
standard cash instrument.
More exotic credit derivatives such as syn-

thetic loss tranches and default baskets cre-
ate new risk-return profiles to appeal to the
differing risk appetites of investors based on
the tranching of portfolio credit risk. In doing
so they create an exposure to default correla-
tion. CDS options allow investors to express
a view on credit spread volatility, and hybrid
products allow investors to mix credit risk
views with interest rate and FX risk.
More recently, we have seen a stepped
increase in the liquidity of these exotic credit
derivative products. This includes the devel-
opment of very liquid portfolio credit vehicles,
the arrival of a two-way correlation market in
customised CDO tranches, and the develop-
ment of a more liquid default swaptions mar-
ket. To enable this growth, the market has
developed new approaches to the pricing and
risk-management of these products.
As a result, this book is divided into two
parts. In the first half, we describe how exotic
structured credit products work, their ratio-
nale, risks and uses. In the second half, we
review the models for pricing and risk manag-
ing these various credit derivatives, focusing
on implementation and calibration issues.

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