Emergence of Default Swap Index Products Harvard Case Solution & Analysis

With the growth of liquidity in the credit derivatives market at the turn of the century, combined with sharply increased corporate defaults fixed income investors and buyers of credit protection were receptive to the new generation of structured credit products, which will enhance their ability to transfer credit risk effectively, particularly in products with improved liquidity and diversification. In April 2003, Morgan Stanley partnership with JPMorgan to cooperate and co-design market set credit indicators. Their first product, called TRAC-X, a portfolio of basic, one name credit default swaps. To improve liquidity and make a profit-X new benchmark for credit trading, Morgan Stanley and JPMorgan offered to make two-sided markets (depending on market conditions) with limited bid-offer spreads and licensed TRAC-X to other dealers. In early 2004, Lisa Watkinson was executive director and global product manager for credit default swaps and index credit products at Morgan Stanley in New York, responsible for the development and marketing of all credit derivatives and credit products index worldwide. Recently, TRAC-X products faced criticism in the market and, opportunistically, competing products cart facility was launched. While Morgan Stanley is still at the forefront of explosive and profitable line of structured credit products, Watkinson faced significant risks of business development, trying to keep the liquidity associated with its first-mover advantage. "Hide
by Darrell Duffy Source: Stanford Graduate School of Business 43 pages. Publication Date: February 12, 2004. Prod. #: F268-PDF-ENG

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