2. CDS Structure Protection Buyer Protection Seller Quarterly premium in arrears Protection Buyer Protection Seller Defaulted debt of reference name Par less fraction of premium Pre-default Post-default

7. CDS Example Protection Buyer Protection Seller 314.486 bps quarterly in arrears Protection Buyer Protection Seller $1,000,000 plus fraction of premium Pre-default Post-default $1,000,000 Par GMAC

8. Par Asset Swap Example Interest Rate Swap Desk AS Trading Desk Investor Floating Floating payments +par at maturity Par Fixed Market Cash=Bond Dirty Price Fixed Coupon Credit Bond

9. CDS - Asset Swap Hedge Interest Rate Swap Desk AS Trading Desk Investor/ Protection Buyer Floating Floating payments +par at maturity Par Fixed Market Cash=Bond Dirty Price Fixed Coupon Credit Bond Protection Seller Quarterly premium in arrears and defaulted debt upon default Par less fraction of premium upon default

14. CDS - Asset Swap Hedge Example Interest Rate Swap Desk AS Trading Desk Investor/ Protection Buyer Market Protection Seller $10,000,000 Par GMAC 5 5/8s of 5/15/2009 Floating 3M LIBOR+273.7bps $10,000,000 initially Fixed 5.45232% semi-annual Floating 3M LIBOR+256.8 bps 314.486 bps quarterly in arrears $10,000,000 less partial premium on default event $10,000,000 par of GMAC debt on default event $9,300,000+$42,187.50=$9,342,187.50

15. Initial Cashflows Interest Rate Swap Desk AS Trading Desk Investor/ Protection Buyer Market Protection Seller $10,000,000 Par GMAC 5 5/8s of 5/15/2009 $9,300,000+$42,187.50=$9,342,187.50 $10,000,000 initially $719,881

16. Typical Periodic Cashflows Interest Rate Swap Desk AS Trading Desk Investor/ Protection Buyer Market Protection Seller $281,250 semi-annually LIBOR+$68,425 quarterly (approx. $204,200) $272,616 semi-annually LIBOR+$64,200 quarterly (approx. $200,000) $79,495 quarterly

17. Cashflows on Default Interest Rate Swap Desk AS Trading Desk Investor/ Protection Buyer Market Protection Seller $10,000,000 Par defaulted GMAC 5 5/8s of 5/15/2009 $10,000,000 less partial premium Unwind IR swap Unwind IR swap $10,000,000 Par defaulted GMAC 5 5/8s of 5/15/2009 or similar

20. CDS Basis Basis=314.486-291.9=22.586 Interest Rate Swap Desk AS Trading Desk Investor/ Protection Buyer Market Protection Seller $930,000+$4,218.75=$934,218.75 Floating 3M LIBOR+273.7bps $1,000,000 Fixed 5.45232% semi-annual Floating 3M LIBOR+256.8 bps 314.486 bps quarterly in arrears $10,000,000 Par GMAC 5 5/8s of 5/15/2009 Z-Spread=291.9