Tuesday, March 13, 2012

Recovery lock on Greece is pricing final haircut at 76%

Dealers are seeing brisk trading in Greece recovery locks. As discussed before a recovery lock is a derivative contract that allows one to bet on the outcome of a CDS auction. Given the uncertainty around which bonds may end up being delivered to the Greek CDS auction, some are using these trades to take out their recovery risk. Yesterday the lock was trading at 24 (24 cents on the euro recovery). That means the market is pricing the final haircut at 76% - which is what the CDS is expected to pay out.

Source: Barclays Capital
For a good overview of recovery lock swaps, see the attached presentation.

Recovery lock

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