 |
| Fair Value Swap Model |
The Credit Suisse Fair Value Swap Model estimates a Fair Value level for the 10-year swap spread based on the historical relationship between the 10-year swap spread and factors that influence it. Deviations from Fair Value consistent with these historical relationships are likely to be temporary. The model determines whether swap spreads are rich or cheap with respect to historical relationships, and lends itself to what-if forward looking scenario analysis.
The primary drivers of swap spreads fall into 3 general categories: Supply and Demand, Systemic Risk, and Hedging Costs. The model uses market-traded proxies for these primary drivers. The slope of the Treasury coupon curve proxies for supply and demand. Option implied volatility in the broad stock market index in the given currency provides a consistent gauge of systemic risk.
Market-specific measures of hedging costs vary from currency to currency. For example, in USD, we use the spread between the most current on the run 10-year treasury and an older treasury to proxy dealer's costs of hedging. In EUR we use the difference between German bond yields and other AAA-rated government yields. For GBP, our current model does not use this factor. The Fair Value swap models are based on weekly data beginning January 1, 1999. Fair Value levels are updated as of close of business each Friday (or closest prior business day if Friday is a holiday).
|
|
