Subprime Mortgage Credit Derivatives
Subprime mortgage bonds and ABS CDOs have become the biggest credit and risk management failure in history. Their story is one of how a small, inconsequential part of the mortgage market grew into a monster large enough to shake the very foundations of the U.S. financial system. It is a story with some elements that are old and some that are new, and it is a story that is far from over. In the meantime, analysts and investors are left wondering about how the $700 billion of outstanding subprime securities should be valued.Written by an expert team of practitioners from UBS—the world's largest wealth manager and a top tier investment banking and securities firm—and Frank Fabozzi of Yale University, Subprime Mortgage Credit Derivatives offers readers the best strategies and risk management tools for dealing with today's growing and currently volatile subprime mortgage credit derivatives market. The authors examine the factors that determine default and prepayment risk, and in the process outline the origins of the current subprime crisis. They look at how the three forms of subprime mortgage risk—cash, single name ABCDS, and the ABX—differ and what drives their relative spreads. And they examine the salient features of the excess spread/overcollateralization structure used on most subprime securities since 1998, showing how even a small change in the prepayment rate or default rate can cause a major shift in cash flows, which in turn can have a major impact on valuations.Explaining how an understanding of ISDA CDO CDS documentation is critical, the authors dissect this document into its working parts and explain each—sorting out the five credit problems the documentation recognizes can happen to a CDO and the two consequences for which the documentation provides. They also provide a simple model that will prove useful in predicting which lower quality bonds will write down and when the write-downs will happen.For all those who want to go long or short these derivatives—as well as understand more about the market pricing of cash underlyings—Subprime Mortgage Credit Derivatives will prove to be an invaluable resource.