Credit derivatives practitioners will likely add forwards on credit-default swaps to their product list early next year, according to Paul Lewitt, global head of credit flow trading at Dresdner Kleinwort Wasserstein in London. This will enable derivatives houses to hedge maturity mismatches in their portfolios.
Lewitt is predicting the birth of the instrument because of the market's switch to standardized quarterly dates for credit-default swaps late last year. Default swaps traditionally matured exactly five-years after the protection was bought, which meant all the firms were trying to hedge different dates and a forward market could not take hold. After the switch, however, all the houses have the same dates which has generated enough demand to foster a market. Lewitt predicts that it will take hold after a full year of trading under the standard maturity dates.
Futures and options were also in Lewitt's crystal ball, but he predicted it will be several years until we see these instruments.
