Repo Curve

A repo curve calibration methodology is presented to bring it more consistent with market quotation. Instead of a fixed term structure for an issuer, the repo curve in essence becomes a “repo factor collection” in which a constant repo factor is stored with respect to each outstanding bond of the issuer.

A repo curve is defined as an adjustment to the discount curve in the pricing of a bond/FRN, when the credit default swaps (CDS) market implied default probability of the issuer is used in the pricing. We have changed the repo curve generation methodology.

Instead of a fixed term structure, the repo curve for each issuer in essence becomes “repo collections” in which a constant repo factor is stored with respect to each outstanding bond with same issuer. The computation of the repo factor for each bond remains unchanged.

With certain probability the bond won’t default before maturity. In this case the bondholder receives coupons at coupon payment dates and principal at maturity. However, there is a possibility that the bond will default before maturity thus the bondholder will only receive a recovered value based on principal plus accrued coupon.

Repo factor actually defines the relationship between CDS spreads and bond yield spreads. Theoretically there is a relationship between bond yield spread and CDS spread, which has been verified by empirical analysis. The repo factor looks at risky bonds in a different way, with the assumption that the default probability of the issuer is same as that implied by the CDS trades. All other information implied in the bond yield spread, such as liquidity and funding cost difference between bonds and CDS trades, still remains the adjustment to the discount factor.

Repo Curve

• zenodo repo
• zenodo repo pdf
• gitbook mbs
• archive frn
• github short
• github exposure