ABCDSreaching their (sub)prime
The recent slump in US sub-prime mortgages was the first real test of the latest index on the block - ABX.HE, which references a basket of credit-default swaps (CDSs) on asset-backed securities (ABS). It's almost as easy as ABCD, explains Martin Calles of Quantifi Solutions
In a world without credit derivatives, investors in real-estate or asset-backed securities had two options: either buy particular pools of collateral or not buy them. Shorting a position or buying protection was out of the question.
These limitations were overcome by mid-2005 when investors welcomed the birth of credit default swaps on asset-backed securities (ABCDS).
These new synthetic instruments acted as credit default swaps on individual home equity issues in the market not previously
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