Markit Excess Return Credit Indices Guide for price based indices



Similar documents
NASDAQ-100 Futures Index SM Methodology

Morningstar Investor Return

GUIDE GOVERNING SMI RISK CONTROL INDICES

MSCI Index Calculation Methodology

SHB Gas Oil. Index Rules v1.3 Version as of 1 January 2013

Duration and Convexity ( ) 20 = Bond B has a maturity of 5 years and also has a required rate of return of 10%. Its price is $613.

PROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART ONE

Return Calculation of U.S. Treasury Constant Maturity Indices

BALANCE OF PAYMENTS. First quarter Balance of payments

Hedging with Forwards and Futures

Nikkei Stock Average Volatility Index Real-time Version Index Guidebook

A Note on Using the Svensson procedure to estimate the risk free rate in corporate valuation

SEB Commodity Sector Index Series. Index Rules January 2014

Chapter 6 Interest Rates and Bond Valuation

Credit Index Options: the no-armageddon pricing measure and the role of correlation after the subprime crisis

Impact of scripless trading on business practices of Sub-brokers.

WHAT ARE OPTION CONTRACTS?

Chapter 6: Business Valuation (Income Approach)

Present Value Methodology

Chapter 9 Bond Prices and Yield

CALCULATION OF OMX TALLINN

Description of the CBOE S&P 500 BuyWrite Index (BXM SM )

Methodology brief Introducing the J.P. Morgan Emerging Markets Bond Index Global (EMBI Global)

S&P/Valmer Indices Methodology

I. Basic Concepts (Ch. 1-4)

Chapter 1.6 Financial Management

INTEREST RATE FUTURES AND THEIR OPTIONS: SOME PRICING APPROACHES

Fifth Quantitative Impact Study of Solvency II (QIS 5) National guidance on valuation of technical provisions for German SLT health insurance

S&P GSCI Crude Oil Covered Call Index Methodology

Equities: Positions and Portfolio Returns

S&P 500 Dynamic VIX Futures Index Methodology

The Grantor Retained Annuity Trust (GRAT)

BALANCE OF PAYMENTS AND FINANCIAL MA REPORT All officiell statistik finns på: Statistikservice: tfn

A Note on Construction of Multiple Swap Curves with and without Collateral

Risk Modelling of Collateralised Lending

Market Liquidity and the Impacts of the Computerized Trading System: Evidence from the Stock Exchange of Thailand

Index Methodology - Equities. 18 December 2015

FORWARD AND FUTURES CONTRACTS

Double Entry System of Accounting

Contrarian insider trading and earnings management around seasoned equity offerings; SEOs

Individual Health Insurance April 30, 2008 Pages

Economics Honors Exam 2008 Solutions Question 5

Why Did the Demand for Cash Decrease Recently in Korea?

INDEX RULE BOOK Leverage, Short, and Bear Indices

Principal components of stock market dynamics. Methodology and applications in brief (to be updated ) Andrei Bouzaev, bouzaev@ya.

The yield curve, and spot and forward interest rates Moorad Choudhry

Chapter 2 Problems. 3600s = 25m / s d = s t = 25m / s 0.5s = 12.5m. Δx = x(4) x(0) =12m 0m =12m

Diagnostic Examination

KiwiSaver Survey September Quarter 2015

Market Efficiency or Not? The Behaviour of China s Stock Prices in Response to the Announcement of Bonus Issues

The Behavior of China s Stock Prices in Response to the Proposal and Approval of Bonus Issues

Table of contents Chapter 1 Interest rates and factors Chapter 2 Level annuities Chapter 3 Varying annuities

LEASING VERSUSBUYING

Total factor productivity growth in the Canadian life insurance industry:

TSG-RAN Working Group 1 (Radio Layer 1) meeting #3 Nynashamn, Sweden 22 nd 26 th March 1999

Appendix D Flexibility Factor/Margin of Choice Desktop Research

FUTURES AND OPTIONS. Professor Craig Pirrong Spring, 2007

µ r of the ferrite amounts to It should be noted that the magnetic length of the + δ

OPERATION MANUAL. Indoor unit for air to water heat pump system and options EKHBRD011ABV1 EKHBRD014ABV1 EKHBRD016ABV1

UNDERSTANDING THE DEATH BENEFIT SWITCH OPTION IN UNIVERSAL LIFE POLICIES. Nadine Gatzert

Stock Trading with Recurrent Reinforcement Learning (RRL) CS229 Application Project Gabriel Molina, SUID

Option Put-Call Parity Relations When the Underlying Security Pays Dividends

Rationales of Mortgage Insurance Premium Structures

CDS index tranches and the pricing of credit risk correlations 1

Interest Rate Parity, Money Market Basis Swaps, and Cross-Currency Basis Swaps

Chapter Four: Methodology

CLASSIFICATION OF REINSURANCE IN LIFE INSURANCE

The Greek financial crisis: growing imbalances and sovereign spreads. Heather D. Gibson, Stephan G. Hall and George S. Tavlas

To Sponsor or Not to Sponsor: Sponsored Search Auctions with Organic Links and Firm Dependent Click-Through Rates

Fair Valuation and Risk Assessment of Dynamic Hybrid Products in Life Insurance: A Portfolio Consideration

INDEX RULES ECPI GLOBAL RENEWABLE ENERGY EQUITY INDEX

Can Individual Investors Use Technical Trading Rules to Beat the Asian Markets?

Journal of Financial and Strategic Decisions Volume 12 Number 1 Spring 1999

The Interest Rate Risk of Mortgage Loan Portfolio of Banks

Single-machine Scheduling with Periodic Maintenance and both Preemptive and. Non-preemptive jobs in Remanufacturing System 1

C Fast-Dealing Property Trading Game C

Are Trading Rules Profitable in Exchange-Traded Funds?

Foreign Exchange and Quantos

Implementing 130/30 Equity Strategies: Diversification Among Quantitative Managers

ABSTRACT KEYWORDS. Term structure, duration, uncertain cash flow, variable rates of return JEL codes: C33, E43 1. INTRODUCTION

DOES TRADING VOLUME INFLUENCE GARCH EFFECTS? SOME EVIDENCE FROM THE GREEK MARKET WITH SPECIAL REFERENCE TO BANKING SECTOR

NATIONAL BANK OF POLAND WORKING PAPER No. 120

4. International Parity Conditions

Cable & Wireless Jamaica s Price Cap Plan

Performance Center Overview. Performance Center Overview 1

Chapter 7. Response of First-Order RL and RC Circuits

THE RICI Handbook. The Guide to the Rogers International Commodity Index

Evidence from the Stock Market

Are European Corporate Bond and Default Swap Markets Segmented?

DO FUNDS FOLLOW POST-EARNINGS ANNOUNCEMENT DRIFT? RACT. Abstract

The Impact of Surplus Distribution on the Risk Exposure of With Profit Life Insurance Policies Including Interest Rate Guarantees.

Forestry profitability panel dataset

Task is a schedulable entity, i.e., a thread

ACTUARIAL FUNCTIONS 1_05

The Impact of Surplus Distribution on the Risk Exposure of With Profit Life Insurance Policies Including Interest Rate Guarantees

Grant Application Format

The Time Value of Money

Puttable and Extendible Bonds: Developing Interest Rate Derivatives for Emerging Markets

The Allocation of Interest Rate Risk and the Financial Sector

Chapter 8: Regression with Lagged Explanatory Variables

Transcription:

Marki Excess Reurn Credi Indices Guide for price based indices Sepember 2011

Marki Excess Reurn Credi Indices Guide for price based indices Conens Inroducion...3 Index Calculaion Mehodology...4 Semi-annual index roll process...4 Model inpu facors...4 Managemen of defauls in he index...5 Trigger even...5 Procedure...5 Appendix: Marki Excess Reurn Credi Index calculaion mehodology for price based indices...6 Index calculaion...6 Index Rolls...6 Furher informaion...7 Copyrigh 2011, Marki Group Limied. All righs reserved. www.marki.com 2

Marki Excess Reurn Credi Indices Guide for price based indices Inroducion This documen explains he echnical calculaion of he Marki CDX Excess Reurn Indices which are based on price based underlying indices: Marki CDX.NA.HY 5-year EXCESS RETURN INDEX Marki CDX.EM 5-year EXCESS RETURN INDEX These indices measure he performance of holding he respecive on-he-run CDX index conracs. The indices reflec a long credi posiion i.e. selling proecion on he CDX defaul swap indices. I herefore replicaes he behavior of a ficiious unfunded porfolio ha buys one CDX index conrac. The porfolio is always invesed in he on-he-run CDX index series ha i racks - each ime a new CDX index series is published, due o he regular index roll (every March and Sepember) or due o a credi even in a consiuen of he curren series, he posiion in he reference porfolio is rolled ino he on-he-run/reduced index posiion. The base index level of Marki CDX.EM 5-year EXCESS RETURN INDEX will be 100 a he launch of Series 7 of he CDX.EM index respecively (i.e., 20 March 2007). The base index level of he Marki CDX.NA.HY 5-year EXCESS RETURN INDEX will be 100 a he launch of Series 8 of he CDX.NA.HY index (i.e., 27 March 2007). Copyrigh 2011, Marki Group Limied. All righs reserved. www.marki.com 3

Marki Excess Reurn Credi Indices Guide for price based indices Index Calculaion Mehodology The Excess Reurn Indices measure he performance of holding he respecive on-he-run CDX index conracs. The CDX.NA.HY and CDX.EM indices are price based indices and are quoed in he marke direcly in price erms. The Excess Reurn Indices involve selling proecion on he CDX credi defaul swap indices - he index reurn hen reflecs a long credi posiion. On he firs rading day of he new on-he-run indices on 20 March and 20 Sepember if hese days are business days, if no he nex business day - he posiion in he off-he-run index is unwound and a posiion in he new series is enered ino. The conracs on all price based indices are sold and purchased a he official End-of-Day mid-price index levels of he relevan rading day. The indices reflec a proecion seller s posiion and herefore receive a coupon on a quarerly basis. Any coupons paid are reinvesed immediaely ino he respecive index on he day hey are paid. Semi-annual index roll process During he regular roll process he index reurn should reflec he value of exiing he long risk posiion in he old (i.e. off-he-run) CDX index conrac and simulaneously enering he new (i.e. on-he-run) index conrac a mid a he end of he firs day of rading of he new index. Transacing a mid means ha ransacion coss are no included. Therefore, for he CDX.NA.HY 5-year EXCESS RETURN INDEX a fla roll ransacion cos of 0.15% for he old and new series is applied while for he CDX.EM 5-year EXCESS RETURN INDEX a fla roll ransacion cos of 0.25% for he old and new series is applied. Model inpu facors Credi curve: For simpliciy, a fla credi curve is used. Recovery raes: As agreed amongs he marke makers for every new CDX index series before each index roll. Premium paymens o be incorporaed ino he model: Coupons ha are agreed amongs he marke makers for every new CDX index series before each index roll. Copyrigh 2011, Marki Group Limied. All righs reserved. www.marki.com 4

Marki Excess Reurn Credi Indices Guide for price based indices Managemen of defauls in he index When credi evens occur, Marki announces ha a new reduced conrac will replace he curren full conrac as he official one. Marki does no deermine credi evens, bu effecively credi evens are reaed in he Toal Reurn Indices as an early roll ino his new conrac. Trigger even Following a credi even in a consiuen of he Marki CDX.NA.HY or Marki CDX.EM indices, he ISDA Deerminaions Commiee voes o decide if a credi even has occurred for he eniy and if an aucion for he defauled eniy is o be held. If he oucome of his voe is posiive, Marki publishes a new version of he index annex zero weighing he relevan eniy i.e. he reduced index. Procedure For he Excess Reurn Indices, he dae on which he indices are rolled from he full index (wih he defauled name) o he reduced index (wihou he defauled name) is usually done on he business day following he aucion dae, bu will be decided by Marki on he basis of liquidiy. The index prices a which he posiion of he full and he reduced index is valued are deermined in he End-of- Day Fixing performed by Marki Group a 18:30 New York for he Marki CDX.NA.HY and Marki CDX.EM indices. Mid levels are used for boh indices. Transacing a mid means ha ransacion coss are no included. If he End-of- Day fixing level is no available for he full version of he index, Marki will use a model price for roll cos calculaion. The roll ransacion coss o be added up are calculaed according o he following mehodology: 1. For a calculaion o be valid, more han five marke makers mus be available for he full index calculaion who delivers valid bid/offers. If he calculaion is invalid, he maximum roll ransacion coss will be applied. The maximum roll ransacion coss are: 0.6% fla for he each of he old and new series for he Marki CDX.NA.HY index 1% fla for he each of he old and new series for he Marki CDX.EM index 2. If he calculaion is valid, he roll ransacion coss are he average bid/offer price deermined in his index calculaion if his value is lower han he maximum roll ransacion coss (as described in 1.) and higher han he minimum roll ransacion coss (as described in 3.) 3. The minimum roll ransacion coss will be wice he regular roll ransacion coss 0.3% fla for he each of he old and new series for he Marki CDX.NA.HY index 0.5% fla for he each of he old and new series for he Marki CDX.EM index For he calculaion o be valid, he average bid and offer prices should be consisen wih quoaions in he underlying marke a he ime of he fixing. The decision on he validiy of he calculaion will ake ino accoun wheher, in he opinion of he calculaion agen, paricipaing marke makers have aken due care and aenion when publishing boh heir bid and offer prices. Copyrigh 2011, Marki Group Limied. All righs reserved. www.marki.com 5

Marki Excess Reurn Credi Indices Guide for price based indices Appendix: Marki Excess Reurn Credi Index calculaion mehodology for price based indices In his appendix, P is he marke price of he curren CDX series a day for all price based indices, i.e., he official CDX price published by Marki Group a each closing of day. Mid prices are used. Index calculaion The base index level is Se a 100 a he launch day of Series 7 of he CDX.EM index (i.e., 20 March 2007) for he Marki CDX.EM 5-year EXCESS RETURN INDEX, and Se a 100 a he launch day of Series 8 of he CDX.NA.HY index (i.e., 27 March 2007) for he Marki CDX.NA.HY 5-year EXCESS RETURN INDEX. The oal reurn index level I on day is calculaed as I (1 = I 1 + R ) where R is he daily reurn on day of he CDX index. R + Coupon = ( P + AC 1) ( P 1 + AC 1 1) where P is he marke price of he curren CDX series a day i.e. 1 P is he clean price for buying proecion on he CDX index. AC is he Accrued Coupon ill day from he las coupon day. Coupon is he coupon paid on day by he curren CDX index, 0 if is no a coupon day When is a roll dae, he reurn is adjused o accoun for he ransacion coss during index roll as described below. Index Rolls In case of he regular semi-annual index rolls and in case of a roll ino a reduced conrac, he porfolio is rolled over and he reurn on he roll dae is calculaed in he usual way, as specified above, and an excess reurn is added o accoun for Bid / Ask rading cos. For prices based indices, he excess reurn is he sum he cos of swiching a from he old series o he new one newseries ExcessR = ( TC + TC where oldseries oldseries TC is he ransacion cos of rolling ou of he old series / version ) newseries TC is he ransacion cos of rolling ino he new series / version Noe ha on he roll dae he R is calculaed using he mark-o-marke value / price of he old CDX series a day -1 and day, and on dae +1 he R + 1 is calculaed using he mark-o-marke value / price of he new CDX series a day and day +1. Copyrigh 2011, Marki Group Limied. All righs reserved. www.marki.com 6

Marki Excess Reurn Credi Indices Guide for price based indices Furher informaion Marki Indices Ld. Tel: 00800 6275 4800 Fax: +44 20 7260 2001 E-mail: suppor@marki.com Inerne: www.marki.com Licenses and Daa Marki Indices Ld. owns all itraxx, itraxx SovX and CDX daa and indices and he inellecual propery righs herein. A license is required from Marki Indices Ld. o creae and/or disribue any produc ha uses, is based upon or refers o any itraxx, itraxx SovX and CDX index or itraxx, itraxx SovX and CDX daa. Oher index producs Marki Indices Ld. owns, manages, compiles and publishes he iboxx cash bond indices. Copyrigh 2011, Marki Group Limied. All righs reserved. www.marki.com 7