Total Return Swaps Research Articles

Ambac Financial Group, Inc.

AbstractInsurance (MIC: 8.2 SIC: 6351 NAIC: 524130)Ambac Financial Group is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in the public and private sectors. Co. provides financial guarantees for public finance and structured finance obligations through its principal operating subsidiary, Ambac Assurance Corp. Co.'s financial and investment products include investment agreements, interest rate and total return swaps and funding conduits, mainly to its clients of financial guarantee business, which include municipalities and other public entities, health care organizations and asset‐backed and structured finance issuers. At Dec 31 2006, Co. had total assets of $20.27 billion.

Pricing Property Index Linked Swaps with Counterparty Default Risk

This paper extends Bjork and Clapham (Journal of Housing Economics 11:418–432, 2002) model for pricing real estate index total return swaps. Our extension considers counterparty default risk within a first passage contingent claims model. We price total return swaps on property indices with different levels of default risk. We develop this model under same assumptions as Bjork and Clapham (Journal of Housing Economics 11:418–432, 2002) and find that total return swap price is no longer zero. Total return swap payer must charge a spread over the market interest rate that compensates him for the exposure to this additional risk. Based on commercial property indices in the UK, we observe that computed spreads are much lower than a sample of quotes obtained from one of the traders in the market.

Ambac Financial Group, Inc.

AbstractInsurance (MIC: 8.2 SIC: 6351 NAIC: 524130)Ambac Financial Group is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in the public and private sectors. Co. provides financial guarantees for public finance and structured finance obligations through its principal operating subsidiary, Ambac Assurance Corp. Co.'s financial and investment products include investment agreements, interest rate and total return swaps and funding conduits, mainly to its clients of financial guarantee business, which include municipalities and other public entities, health care organizations and asset‐backed and structured finance issuers. At Dec 31 2006, Co. had total assets of $20.27 billion.

Ambac Financial Group, Inc.

AbstractInsurance (MIC: 8.2 SIC: 6351 NAIC: 524130)Ambac Financial Group is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in the public and private sectors. Co. provides financial guarantees for public finance and structured finance obligations through its principal operating subsidiary, Ambac Assurance. Co.'s financial and investment products include investment agreements, interest rate and total return swaps and funding conduits, mainly to its clients of financial guarantee business, which include municipalities and other public entities, health care organizations and asset‐backed and structured finance issuers. At Dec 31 2006, Co. had total assets of $20.27 billion.

Ambac Financial Group, Inc.

AbstractInsurance (MIC: 8.2 SIC: 6351 NAIC: 524130)Ambac Financial Group is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in the public and private sectors. Co. provides financial guarantees for public finance and structured finance obligations through its principal operating subsidiary, Ambac Assurance. Co.'s financial and investment products include investment agreements, interest rate and total return swaps and funding conduits, mainly to its clients of financial guarantee business, which include municipalities and other public entities, health care organizations and asset‐backed and structured finance issuers. As of Dec 31 2006, Co. had total assets of $20.26 billion.

Ambac Financial Group, Inc.

AbstractInsurance (MIC: 8.2 SIC: 6351 NAIC: 524130)Ambac Financial Group is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in the public and private sectors. Co. provides financial guarantees for public finance and structured finance obligations through its principal operating subsidiary, Ambac Assurance. Co.'s financial and investment products include investment agreements, interest rate and total return swaps and funding conduits, mainly to its clients of financial guarantee business, which include municipalities and other public entities, health care organizations and asset‐backed and structured finance issuers. As of Dec 31 2005, Co. had total assets of $19.73 billion.

Comments on M. Dooley and N. Roubini: A new Bretton Woods system?

These excellent papers focus mainly on one issue: the question of a hard landing for the US Dollar. This is far from the only question raised by monetary arrangements across the Pacific. But I will start with the hard landing—discussing its drivers and mechanisms—and then go on to consider other costs and risks, and some wider implications of the very different experience we are having within Europe and within the Pacific region. Regarding drivers, the fundamental questions in the papers are: what is driving developments in the fixed rate Pacific region; and if this is mainly China, does that mitigate risks of a hard landing? First, I accept Nouriel Roubini’s description of the structural deterioration in the US fiscal deficit as a separate and exogenous driver. There are countries for which “financing ease” can drive the fiscal deficit, but this has not been the case for the United States, where budgetary developments are unarguably driven “above the line.” Nonetheless, I do see the dominant and most significant driver in our present context being the policies of countries, such as China, that are preventing real appreciation. In the case of China, I agree with Michael Dooley that this has to be viewed as a matter of development strategy. That strategy is concerned not only with export-driven growth (which, as Nouriel says, does not require large trade surpluses). It is concerned also with an insurance motive of holding large reserves to ensure policy autonomy in the face of shocks. In the view of many observers, the strategy is also designed to cushion adjustment in the domestic financial system. I can well imagine that China has internalised the cost of future capital losses on its US Treasury bond holdings as part of that strategy. Like Nouriel, I do not completely buy the “total return swap” argument. But I do think that China’s strategic approach IEEP (2006) 3:333–336 DOI 10.1007/s10368-006-0065-1

Credit risk management

PurposeThis paper aims to explore the possible use of credit derivatives by corporate treasurers. Corporations have, in recent years, grown comfortable with the idea of using traditional derivative products to hedge their exposure to, for example, interest rate and foreign exchange risk. Credit risk, on the other hand, has proven a more difficult animal to tame. Whilst avenues for the management of credit risk do exist, for example, by the use of traditional insurance products and letters of credit, such means are not always convenient.Design/methodology/approachIn this paper, both the academic and practitioner literature on credit derivatives and their application are reviewed. Then, by means of some simple numerical examples, the possible uses to which corporate treasurers might put credit default swaps and total return swaps are illustrated.FindingsThe credit derivatives market is, at present, dominated by large banks and insurance companies who trade credit exposure among themselves. As the credit derivatives market becomes more liquid and transparent, it is asked: “Should corporate treasurers consider using credit derivatives to manage their credit risk exposure?” A number of simple and practical ways in which corporations can use credit derivatives to manage risk are explored and the practical strengths and weaknesses of following such approaches are emphasised.Originality/valueThis paper is of particular value to corporate treasurers. This is one of the first academic papers to consider credit derivatives from a financial management perspective.

Ambac Financial Group, Inc.

AbstractInsurance (MIC: 8.2 SIC: 6351 NAIC: 524130)Ambac Financial Group is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in the public and private sectors. Co. provides financial guarantees for public finance and structured finance obligations through its principal operating subsidiary, Ambac Assurance. Through its financial services subsidiaries, Co. provides financial and investment products including investment agreements, interest rate and total return swaps and funding conduits, primarily to its clients of the financial guarantee business, which include municipalities and other public entities, health care organizations and asset‐backed and structured finance issuers.

Ambac Financial Group, Inc.

Mergent's Dividend AchieversVolume 3, Issue 4 p. 11-11 U.S. Company Reports Ambac Financial Group, Inc.† First published: 10 October 2006 https://doi.org/10.1002/div.4654 † Contact: : Phillip B.Lassiter — Chmn. Address: : One State Street Plaza, New York, NY 10004 Web Site: : www.ambac.com AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Abstract Insurance (MIC: 8.2 SIC: 6351 NAIC: 524130) Ambac Financial Group is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in the public and private sectors. Co. provides financial guarantees for public finance and structured finance obligations through its principal operating subsidiary, Ambac Assurance. Also, Co. provides financial and investment products including investment agreements, interest rate and total return swaps and funding conduits, primarily to its clients of the financial guarantee business, which include municipalities and other public entities, health care organizations and asset-backed and structured finance issuers. Volume3, Issue4Autumn (Fall) 2006Pages 11-11 RelatedInformation

CMBS Total Return Swaps

The total return swap market has been a key financial market innovation to control risk or to enhance returns. For commercial mortgage-backed securities (CMBS), several dealers offer total return swaps on various CMBS indexes and their subsectors. The authors discuss the mechanics of these CMBS swaps and the economic rationale as to why the market has offered attractive terms to those who want to gain exposure to the CMBS sector, while eliminating the idiosyncratic risk between a CMBS cash portfolio and the CMBS indexes.

Ambac Financial Group, Inc.

AbstractInsurance (MIC: 8.2 SIC: 351 NAIC: 24130)Ambac Financial Group is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in the public and private sectors. Co. provides financial guarantees for public finance and structured finance obligations through its principal operating subsidiary, Ambac Assurance. Through its financial services subsidiaries, Co. provides financial and investment products including investment agreements, interest rate and total return swaps and funding conduits, primarily to its clients of the financial guarantee business, which include municipalities and other public entities, health care organizations and asset‐backed and structured finance issuers.

Ambac Financial Group, Inc.

Abstract Insurance (MIC: 8.2 SIC: 6351 NAIC:524130)Ambac Financial Group is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in both the public and private sectors. Co. provides financial guarantees for public finance and structured finance obligations through its principal operating subsidiary, Ambac Assurance. Through its financial services subsidiaries, Co. provides financial and investment products including investment agreements, interest rate and total return swaps and funding conduits, principally to its clients which include municipalities and their authorities, school districts, health care organizations and asset‐backed issuers.

Ambac Financial Group, Inc.

AbstractInsurance (MIC: 8.2 SIC: 6351 NAIC:524130)Ambac Financial Group is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in both the public and private sectors. Co. provides financial guarantees for public finance and structured finance obligations through its principal operating subsidiary, Ambac Assurance. Through its financial services subsidiaries, Co. provides financial and investment products including investment agreements, interest rate and total return swaps and funding conduits, principally to its clients which include municipalities and their authorities, school districts, health care organizations and asset‐backed issuers.

CDO Performance Unplugged

The CDO market has historically been plagued by a lack of pricing transparency. The birth of a new secondary market offers an opportunity to take a first look at real price performance. In this article, the authors estimate performance focusing on a universe of over 100 senior notes. They find that senior notes have lost 1.3% (above Libor) since inception. Leveraged-loan-backed deals were the best performers, down only 0.1%, while high yield senior notes were down 2.4%. They note that bullish investors may find value in many AA-rated notes in the secondary market, while bearish investors should take comfort in shorting AAAs (through total return swaps) at levels near par. They also note that a more balanced position is to get long AAs and short AAAs.

Ambac Financial Group, Inc.

AbstractInsurance (MIC: 8.2 SIC: 6351 NAIC:524130)Ambac Financial Group is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in both the public and private sectors. Co. provides financial guarantees for public finance and structured finance obligations through its principal operating subsidiary, Ambac Assurance. Through its financial services subsidiaries, Co. provides financial and investment products including investment agreements, interest rate and total return swaps and funding conduits, principally to its clients which include municipalities and their authorities, school districts, health care organizations and asset‐backed issuers.

Credit derivatives with multiple debt issues

We evaluate the most actively traded types of credit derivatives within a unified pricing framework that allows for multiple debt issues. Since firms default on all of their obligations, total debt is instrumental in the likelihood of default and therefore in credit derivatives valuation. We use a single factor interest rate model where the exponential default frontier is based on total debt and is made coherent with observed bond prices. Analytical formulae are derived for credit default swaps, total return swaps (both fixed-for-fixed and fixed-for-floating), and credit risk options (CROs). Price behaviors and hedging properties of all these credit derivatives are investigated. Simulations document that credit derivatives prices may be significantly affected by terms of debt other than those of the reference obligation. The analysis of CROs indicates their superior ability to fine-tune the hedging of magnitude and arrival risks of default.

Credit Derivatives with Multiple Debt Issues

We extend the class of structural models of credit derivatives by allowing for multiple debt issues. Since firms default on all of their obligations, total debt is instrumental in the likelihood of default and therefore in credit derivatives valuation. We use a mono-factor interest rate model where the exponential default frontier is based on total debt and is made coherent with observed bond prices. Analytical formulae are derived for credit default swaps, total return swaps (both fixed-for-fixed and fixed-for-floating), and credit risk options. Simulations document that credit derivatives prices are affected in a non-trivial way by terms of debt other than those of the reference obligation.

Tax-Efficient Investing Using Private Placement Variable Life Insurance and Annuities

The authors start by observing that many hedge funds and managed accounts have impressive before-tax returns, but that their returns may not be as impressive on an after-tax basis. Though tax planning for hedge funds and other investments can improve after-tax returns, recent changes in the tax law, such as the constructive sales rules, have made tax-deferral more difficult. They indicate that one method to defer hedge fund taxable income and convert it to long-term capital gain (investing in the fund through a derivative such as a total return swap) has significant task risks of being disallowed and is the target of proposed legislation in Congress. They then turn to the idea that private placement variable life insurance has the potential of eliminating income tax on hedge fund and other earning and, with proper estate planning, eliminating estate tax as well. They discuss private placement variable life insurance and annuities, the income tax savings, asset protection, and estate planning benefits of such policies, how the insurance can be used as part of an overall long term investment strategy, which investors should consider the policies, and a comparison of United States and offshore policies.

FINANCIAL INNOVATIONS IN LEVERAGED COMMERCIAL LOAN MARKETS

In the last decade, three innovations in commercial loan‐based securities and derivative have enabled institutional investors to access commercial loan markets on leveraged terms: collateralized loan obligations (CLOs); loan‐based total return swaps; and leveraged loan‐based structured notes (LLSNs). These innovations have been driven by a combination of structural changes in the banking industry, enhanced technology for securitizations, reformed banking regulations, and the advent of credit derivatives.Besides providing new investment opportunities for institutional investors, these recent innovations in loan markets also promise to reinforce the existing trend in banking away from financial intermediation and toward information intermediation. Such a trend, the authors argue, is helping to ensure the long‐run viability of commercial banks. By transforming loan assets in the ways described in this article, banks can generate fee income instead of interest income (thus limiting their capital requirements and interest rate and credit exposures) while still exploiting their comparative advantage in credit analysis and monitoring.