Lehman Brothers has started to offer perfect asset swaps and began marketing them over the summer to European investors. A perfect asset swap is used to remove an investor's interest rate and currency risk even if a bond defaults, whereas a cross-currency asset swap only protects investors if the asset never defaults, explained Dominic O'Kane, head of Lehman's European quantitative credit research group in London. O'Kane said Lehman has seen a lot of client interest in Europe for these types of swaps as credit spreads are wider in the U.S. and there is potential for investors to buy dollar-denominated U.S. names.
"This is something that we've been looking to do for a while, but we needed to build the right analytics," O'Kane said, explaining that the firm needs to be able to hedge the risk. In a perfect asset swap, the counterparty cancels the fx and interest rate hedge if the bond defaults and then pays the investor the recovery value of the bond in the investor's regional currency.
