Nomura International plans to start taking basis risk in its credit derivatives book through buying protection with one set of documentation and hedging it with a contract with different documentation. Mark Crawley, credit derivatives structurer in London, said the most likely trades will be to buy credit protection without the restructuring credit event from clients and sell protection in the inter-dealer broker market using standard documentation, including the restructuring credit event.
"Everything is a trade-off between price and documentation risk," noted Crawley, adding that the further the trade moves away from the standard language, the more it will cost.
Crawley said the firm is currently modeling the pricing of the basis risk, but will likely start trading the bespoke trades before year end.
