Thursday, March 29, 2007

Brady Bonds 

Brady bonds make an interesting example trade.

  1. There is a counterparty risk to the trade, as with any bond
  2. There is an issuer risk to the issuer of the bond
  3. There is another issuer risk to the guarantor of the bond
Then on to the pricing.

With a Brady, it is usually just the capital that is guaranteed, and not necessarily for the entire period of the bond.

That means the different issuer risks need different calculations.

It also means that to price a Brady, you would need a curve for the guarantor as well as curve for the issuer.

Interesting problem to think about and how to code it in a generic way

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