Hedging recovery risk

recovery swaps

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With memories of high-profile bankruptcies, such as Enron and WorldCom, indelibly etched on investors’ minds, decreasing default rates and an optimistic economic outlook have done little to allay concerns over recovery levels in the event of default. As the demand for a means to hedge recovery risk continues to grow, investment banks are increasingly trading a new credit derivative instrument called the recovery swap, which is changing the way investors assume, and mitigate, recovery risk.

The re

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