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Rauxon Energy Co. Sales Presentation

Rauxon Energy Co. Sales Presentation. Stanley Securities September 23, 2010. Introduction. David Lin, Investment Grade Credit Research Shengbao Luo , Credit Hybrids Sales Casey Wang, Market Risk Management George Wang, Credit Hybrids Trading Peilin Zhang, Quantitative Credit Strategies.

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Rauxon Energy Co. Sales Presentation

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  1. Rauxon Energy Co. Sales Presentation Stanley Securities September 23, 2010

  2. Introduction David Lin, Investment Grade Credit ResearchShengbaoLuo, Credit Hybrids SalesCasey Wang, Market Risk ManagementGeorge Wang, Credit Hybrids TradingPeilin Zhang, Quantitative Credit Strategies

  3. The Objective • Offer counterparty default protection against deeply in the money FX Forward: • Counterparty: UJB Financial • Notional: 500MM EUR • Contractual forward price: $1.024/EUR • Time to maturity: 3 years • Spot USD/EUR rate: $1.22/EUR • Current Exposure: $98MM • Need protection against UJB’s gradual financial distress

  4. The Solution Rating Contingent Credit Default Swap (RCCDS)

  5. Term Sheet • Protection Seller: Stanley Securities • Protection Buyer: Rauxon Energy Co. • Trade Date: 10/1/2010 • Expiration Date: 9/30/2013 • Reference Entity: UJB Financial Seller Pays: • Payoff: (FX Forward Market Value)+ × (1 – Recovery) • Credit Event: Downgrade, followed by failure to pay • Settlement: Cash (USD) Buyer pays: • 11 bps on $500MM notional • Standardized quarterly schedule

  6. Deal Comparison

  7. Cashflow UJB downgrades Risk Leg Time Premium Leg

  8. Suitability and Limitations • No protection against out of blue default • May need to remake the FX Forward trade $500,000 to your bottom line

  9. Rating Contingent Credit Default SwapInternal Trade Review Stanley Securities September 23, 2010 David Lin ShengbaoLuo Casey Wang George Wang Peilin Zhang

  10. Valuation Overview • Hazard rate process calibration • Rating transition simulate using hazard • FX forward valuation • RCCDS valuation

  11. Hazard Rate Process Calibration Calculation parameters • Calibrated parameters: h0, θ • Fixed parameters: α, v(ht,t) Simulation Parameters • Time step • Number of paths

  12. Rating Transition • Simulated using hazard rates

  13. Market Risk

  14. Hedging Dynamic delta hedging as part of the credit hybrids portfolio • UJB credit risk • FX delta • IR PV01 • Cross partials

  15. Model Risk • Structural model • OU hazard rate process – rate can be negative, and can be different from the real process • Coarseness of time steps • Knock in knock out between steps

  16. How much $ did we make? • Fair market spread: 9.39 bps • Offer spread: 11 bps • Day one hedging cost: $26K • Day one P&L: $174K

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