JPMorgan has started marketing equity-default swaps, which work in the same way as a credit-default swap but use an equity trigger. The are, however, two major differences. First, protection can be triggered by the stock hitting a floor level. Second, there is a fixed recovery rate, according to JPMorgan marketing material obtained by DW.
The equity-default swaps trade at higher spreads than equivalent credit-default spreads because there is more chance of the share price falling 70% than the company suffering a formal default. For example, five-year EDS on DaimlerChrysler was priced at 415 basis points last week, while the CDS spread was 110bps.
