Share these talks and lectures with your colleagues
Invite colleaguesDocumentation risk in credit default swaps: When is a hedge not a hedge?
Abstract
In March 2000, Ecobel Land Inc. defaulted on a Bear Stearns International US$10m loan initially believed to be backed by a surety bond. Bear Stearns International had hedged the non-payment risk with a credit default swap with Aon Corporation. Despite alleged fraud, documentation errors and a lack of due diligence which rendered the surety bond worthless, the credit default swap represented an appropriate hedge. Aon Corporation, in turn, believed it had hedged its position with a credit default swap with Société Générale. However, documentation errors resulted in Aon Corporation being unhedged and liable for the US$10m plus legal fees and associated costs resulting from honouring the swap and related litigation. This paper highlights the importance of documentation in establishing appropriate hedges.
The full article is available to subscribers to the journal.
Citation
Griffiths, Mark and Drake, Philip (2010, January 1). Documentation risk in credit default swaps: When is a hedge not a hedge?. In the Journal of Risk Management in Financial Institutions, Volume 3, Issue 1.Publications LLP