Credit Suisse First Boston plans to introduce an evaluation tool for corporate bond investors that incorporates correlated factors including equity volatility and credit default swap movements. Krishna Memani, a global credit strategist at CSFB, says the model will provide investors with a new way to find value in corporate bond prices and "take the guesswork" out of risk management, by relying on underlying credit factors. The tool, a CUSP model--for credit underlying securities pricing--will be rolled out to hedge funds and long-only investors in the next few months. It can be applied to investment-grade bonds and fallen angels. The model uses equity prices, current debt levels, performance of credit derivatives and equity volatility to compute where a given company's bonds spreads should be, says Memani. Previously, "we didn't have a direct tie between default swaps and the equity volatility markets," he notes, adding that increasing correlations have made the model possible.
The tool is the first of its kind, according to Memani, because it highlights new arbitrage opportunities since it combines stock price/volatility and the credit markets into one model.