Lehman Brothers has recently started offering hybrid credit-default swaps that either enhance yield for sellers of protection or reduce the cost for purchasers. These credit products include an additional derivative component, such as an fx or interest rate option, explained Georges Assi, director in structured credit trading at Lehman in London.
For example, one trade the firm recently structured reduced the cost of protection for a customer by 30 basis points to 170bps because it included a contingent fx component. The credit-default swap can only be triggered by a credit event if the euro does not appreciate above USD1.22 against the greenback. This trade would be ideal for an investor that only wanted to hedge a credit in a weak dollar environment, Assi noted.
This is a technology that firms could eventually include in synthetic collateralized debt obligations, much in the way perfect asset swaps are currently used, Assi noted. He added the swaps may become more popular if credit spreads tighten, as they could be used to boost yield. Mark Stainton, director in the integrated credit trading group at Deutsche Bank in London, said it has executed a number of transactions with hybrid risk during the past year.
