Credit Default Swaps on Amr Corporation: Cash or Credit?

7 Pages Posted: 30 May 2017

See all articles by Pedro Matos

Pedro Matos

University of Virginia - Darden School of Business; European Corporate Governance Institute (ECGI)

Peter Lee

University of Virginia - Darden School of Business


This case puts the students in the shoes of Jeff Thomas, a high-yield credit research analyst for a hedge fund. Thomas' portfolio manager has asked him to come up with a potential trade idea for AMR Corporation (the parent company of American Airlines) using a credit default swap (CDS). Thomas wanted to gauge whether the CDS spread prevailing in the market was too high or too low relative to AMR's credit outlook. He was going to use both structural and reduced form CDS pricing models and compare them against the prevailing CDS spreads in the market. More importantly, Thomas needed to come up with a trade recommendation.



Mar. 9, 2016

Credit Default Swaps on AMR Corporation: Cash or Credit?

As he drove home on a frigid night late on February 24, 2011, Jeff Thomas reflected on the day's events and started thinking about all the work that he would have to do after he got home. As a credit research analyst for Blue Hill Asset Management (BHAM), Thomas was a part of the hedge fund's high-yield team and was responsible for identifying “mispricings” in the credit market. He had joined the firm just six months earlier after graduating from his MBA program and had put in many long hours as he acclimated himself with the firm and his role.

BHAM was a hedge fund that focused on fundamental relative value strategies. Its strategies were aimed at taking advantage of relative pricing discrepancies between similar securities or derivatives relative to the underlying security. BHAM combined quantitative, technical, and fundamental techniques to identify these strategies.

Earlier that day, one of the senior portfolio managers had come by Thomas's desk after receiving a phone call from an investment bank. The investment bank was in the process of building a book for a private offering of senior secured notes by AMR Corporation (AMR), the parent company of American Airlines. It had called BHAM to gauge its interest. The portfolio manager had declined, but was intrigued about identifying potential strategies regarding the AMR credit. As a potential investment, AMR was an interesting high-yield opportunity, since American Airlines was the only major U.S. airline not to have filed for bankruptcy, which left it with a higher debt burden and labor costs than its competitors. The portfolio manager mentioned to Thomas that he was especially interested in trying to identify opportunities in credit derivatives, as this market tended to have better liquidity than the bond market.

. . .

Keywords: credit default swaps, fixed income, financial derivatives, AMR, American Airlines

Suggested Citation

Matos, Pedro and Lee, Peter, Credit Default Swaps on Amr Corporation: Cash or Credit?. Darden Case No. UVA-F-1745. Available at SSRN:

Pedro Matos (Contact Author)

University of Virginia - Darden School of Business ( email )

University of Virginia
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434 243 8998 (Phone)
434 924 0726 (Fax)


European Corporate Governance Institute (ECGI) ( email )

B-1050 Brussels

Peter Lee

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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