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Stanley Securities September 23, 2010. David Lin, Investment Grade Credit Research Shengbiao Luo, Credit Hybrids Sales Casey Wang, Market Risk Management.

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Presentation on theme: "Stanley Securities September 23, 2010. David Lin, Investment Grade Credit Research Shengbiao Luo, Credit Hybrids Sales Casey Wang, Market Risk Management."— Presentation transcript:

1 Stanley Securities September 23, 2010

2 David Lin, Investment Grade Credit Research Shengbiao Luo, Credit Hybrids Sales Casey Wang, Market Risk Management George Wang, Credit Hybrids Trading Peilin Zhang, Quantitative Credit Strategies The World Class Team

3 Agenda The Objective The solution – downgrade contingent protection Cashflow Payoff Scenarios Cost Analysis Suitability and limitation Appendix – Term Sheet

4 The Objective Offer counterparty default protection against deep in the money FX Forward: Counterparty: UJB Financial Notional: 500MM EUR Time to maturity: 3 years Contractual forward price: $1.024/EUR Spot USD/EUR rate: $1.22/EUR Current Exposure: $98MM Need protection against UJB’s gradual financial distress

5 The Solution Rating Contingent Credit Default Swap (RCCDS) Credit protection contingent on rating downgrade Notional of default payoff contingent on mark to market value of FX forward $0.5MM savings in protection cost

6 Cash flows Risk Leg Premium Leg Time UJB downgrades

7 Payoff Scenario

8 RCCDS is Cost Effective Notional ($MM) Protection PV ($MM) Upfront price points Running Spread (bps) CDS (40% recovery) CDS (25% recovery) Full protection on expected FX forward MV 98* RCCDS 98* % reduction in premium compared with full protection * Based on current MV of FX forward, future exposure may vary

9 Suitability and Limitations No protection against out of blue default May need to remake the FX Forward trade Cost: $50K

10 $500,000 to your bottom line

11 Term Sheet Protection Seller: Stanley Securities Protection Buyer: Rauxon Energy Co. Trade Date: 10/1/2010 Expiration Date: 9/30/2013 Reference Entity: UJB Financial Seller Pays: Payoff: (FX Forward Market Value) + × (1 – Recovery) Credit Event: Downgrade, followed by bankruptcy Settlement: Cash (USD) Buyer pays: 56 bps on $98MM notional Standardized quarterly schedule


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