Wachovia Securities in New York has been pitching first-to-default baskets with an interest rate overlay following the consolidation of it structured notes and structured credit desks a few months ago. Patrick Wu, v.p. in structured credit trading with the firm in New York, said investors are demanding basket trades offering credit exposure and also addressing interest rate risk.
An example structure is a first-to-default basket and, on top of that, a fixed-rate coupon. When the first credit in the basket defaults, the entire trade unwinds meaning the structure features correlation risk between rates and credit. To hedge the interest rate risk, Wachovia enters into a swap to receive a fixed rate and pay floating. Credit exposure is delta hedged through typical correlation trades, Wu said.
Wachovia has also been structuring simpler and smaller first-to-default baskets, typically linked to five or six corporate credits. These baskets are geared toward single-name corporate credit funds. Wu said Wachovia was mainly pitching baskets to correlation and structured credit hedge funds until the downgrades of Ford Motor Co. and General Motors Corp., when the firm decided to diversify counterparty risk.
