Tranche trauma

A combination of systemic risk concerns and huge flows has dramatically affected pricing in the corporate index and tranched credit derivatives markets. But while some dealers and investors have been left reeling, the dislocation has presented a buying opportunity for others. By Navroz Patel

Traders in the credit derivatives market are enduring the most traumatic of times. Fears of systemic risk arising from the troubled US subprime mortgage sector have battered the corporate credit derivatives index market. As detailed in last month's Risk, extreme index spread widening and volatility have caused many popular hedging and trading strategies to unravel, triggering significant mark-to-market losses for dealers and investors (Risk August 2007, page 62-64).

Indeed, as last month's issue