---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 04/05/2001 
09:03 AM ---------------------------


Bryan Seyfried
03/30/2001 10:08 AM
To: Vince J Kaminski/HOU/ECT@ECT
cc:  
Subject: Asset Swaps vs CDS's


---------------------- Forwarded by Bryan Seyfried/LON/ECT on 30/03/2001 
17:12 ---------------------------


Martin McDermott
23/03/2001 18:47
To: John Sherriff/LON/ECT@ECT, Bryan Seyfried/LON/ECT@ECT
cc:  

Subject: Asset Swaps vs CDS's

John, 

I haven't had much time to put something together on this issue.  
Fundamentally both instruments represent the same credit risk, i.e. same 
credit events and contingent payments, both represent senior unsecured credit 
risk.  The differences in pricing therefore arise purely from supply and 
demand.  One would expect generally that the asset swap would be lower than 
the CDS because of liquidity:  there are only so many bonds out there, and so 
demand for Asset swaps is limited.  I am attaching a one page note by JP 
morgan where they claim that one of the principal reasons for the CDS to be 
more expensive is people hedging convertible bonds by combining  (1) a call 
option on the equity and (2) a CDS.  If the call is cheap they will be 
willing to pay more for the CDS, driving the price up.  I'll try to 
synthesize something more complete next week.

Cheers

Martin