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What is FreeCreditDerivatives?

FreeCreditDerivatives is a free service that provides market implied default rates for US investment grade indices. FreeCreditDerivatives will tell you, for example, what the probability is that a AAA financial will default in 5 years. The term market implied default rate means a calculated default rate based on market prices of traded bonds.

Isn‘t that the same as a Moody’s or S&P rating?

Not at all. Rating agencies base their rating on a variety of factors, most significantly the balance sheet and income statement of a firm. That means the ratings are inherently backward looking, because they are based on events that have already happened, not on what will happen. Even worse, accounting statements are issued only quarterly, and the numbers themselves can vary depending on what management chooses to show. Even then, the rating itself is decided on by a small group of people at the rating agency, who may not be the best judge of a company’s prospects. Finally, a rating agency issues just a single rating for each bond. This rating does not break out the bond’s likelihood of default as a function of time, even if a company’s prospects are very good for the next year, but may worsen significantly later on (perhaps due to markets changing, patents expiring, key executives retiring, etc.). The single ratings themselves are also very broad brush, so many companies can have the same rating, and yet have very different prospects.

FreeCreditDerivatives bases its probability of default purely on where a company’s bonds are trading, which represents the market’s best assessment of the default risk of the company. This means there is no subjectivity in the calculations, and there is not any one person or small group of people setting the probability. These numbers are forward looking, taking into account all the things the market feels may happen in the future. The numbers are also precise, out to many decimal places, and there are more numbers, as well: FreeCreditDerivatives provides probabilities for one through twenty years out.

How are the numbers calculated?

FreeCreditDerivatives uses a corporate bond’s spread over where a similar maturity government bond is trading to calculate the implied default risk embedded in the bond’s price, and yield. It does this using Savvysoft’s TOPS Credit, a sophisticated software package used to price credit derivatives. TOPS Credit uses the same mathematical methodologies that underlie option pricing theory, applied to the credit derivatives market.

Where do you get the data from?

The data in FreeCreditDerivatives comes from the market’s premier data providers for interest rates, including Bloomberg. These are the same data providers used by the world’s leading banks and investment houses to price their corporate bonds every day.

Who is this for?

FreeCreditDerivatives will be of great value to credit derivatives traders and salespeople, Collateralized Debt Obligation (CDO) structurers, corporate bond traders and analysts, risk managers, corporate treasuries, bank loan officers, academics, and even people at ratings agencies.

Who provides this service?

FreeCreditDerivatives is from Savvysoft, the world leader in derivatives pricing.

The company’s flagship product is TOPS. Savvysoft’s TOPS is a set of derivatives valuation models that handles the full range of derivatives structures from the most plain vanilla to the most exotic derivatives structures. The derivatives markets TOPS cover include: Fixed Income, Equity, FX, Commodity, MBS, Convertible, Energy, Electricity and of course the Credit derivatives markets.

How much does it cost?

Nothing. It’s free, just as the name implies. A companion product, FutureDefaults, is available via a monthly subscription, and provides market implied default probabilities and spreads for individual issuers. The cost depends on how many corporations a user wishes to get default rates and yield curves for. Please contact us at info@futuredefaults.com or call 1 212-742-8677 for a specific quote.

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