Freeing capital: swaps versus CLOs
Korea Development Bank’s recent launch of a $1.5 billion global bond highlighted the close links between the capital markets and credit derivativese?
The sudden appearance of a liquid reference asset sparked a rush to hedge South Korean country risk. Banks wary of exposures to an increasingly shaky banking system queued to buy default swaps on KDB. Investors – mostly banks – were happy to sell their bonds and re-book KDB risk on the other side of the swaps, earning a 10bp pick-up.
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