When a credit curve is steep
On the other hand, if one has a negative short-term view on a credit but believes it to survive for the next 5 years, its credit quality will improve significantly. This view can be expressed via buying a long-dated 30-year par asset swap and buying 5-year protection on the single name thereby creating a long forward spread position (or buying short-dated default protection and selling longer dated default protection). This position would benefit from a flattening of the credit curve.
A steep credit curve implies a steep forward credit curve. A forward default swap is buying or selling protection for the given maturity at a given point in the future at the forward CDS spread. For example, Munich Re senior 2-year protection is at 21 bp and the 7-year protection trades at 34 bp. Selling 2-year protection and buying 7-year protection results in a 5-year CDS two years forward (2 _ 5 spread) at a level of 40 bp.
Welcome to my website! My name is Isabela Wane. I am a business consultant currently working for a major US company. I am also an author of several publications concerning payday loans and credits. On this website you can find my articles that dwell primarily on how to select a good payday loan and what things to avoid when taking a credit. I hope that you can all benefit from my knowledge.