Cash & Loans Advice Blog

Make sure you use the proper credit strategy

Basis trades/Convertible bond hedging: As an example the basis for Fiat widened massively following issuance of a 2.2 billion convertible and deteriorating credit sentiment at the end of 2001. It is worth mentioning that the negative basis trade (long cash, long protection) is not entirely risk-free. If the bond is actually restructured at the time of default it is no longer deliverable. The risk-free positive basis trade cannot be set up till maturity because one is not able to lock in the repo rate of the bond (short cash, short protection).

Capital structure arbitrage: These might be strategies where investors take a position in a default swap versus an equity put option. If equity is undervalued, CDS levels are tight and debt is rich the following strategy appears to be appropriate. For example, selling out-of-the-money puts versus buying protection allows to position for a rally in the stock/declining equity volatility and to “hedge” this opinion against the risk of the widening of spreads on the company’s debt. The option premium earned is used to fund the CDS, with positive or negative carry. It is important to realize that this is not a pure arbitrage or risk-free trade.

Reducing sales costs and improving credit efficiency

The internet enables sales people to have the latest, most up-to-date information to promote sales. This might include product information, testimonials, details of special offers and customer or market intelligence.

This information is particularly valuable when in-depth product information is needed, and it can be provided directly to distributors as well as the salesforce.

The internet allows products to be evaluated quickly and easily without assistance, which can be particularly valuable for complex products or rapidly evolving markets. As a result, product and technical experts can be used for greater value-added activities. Furthermore, if the sales system is effective, complex, customised price quotations can be prepared for customers, possibly without sales people intervening. This has various advantages: it provides an immediate response to customers’ enquiries, reduces the lead time for sales, ensures accurate hand-over of order details, and saves time and effort in taking and transmitting orders. In effect, everything is done better, more quickly and more costeffectively. It also provides accuracy, another hidden benefit of the internet. This not only increases speed but also leads to great reductions in waste. Furthermore, depending on the industry and product, it can lead to reductions in inventory costs as products are made to order.