# Tag Info

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One could say that a CDS price is determined by the physical default probability and the risk premium. The physical PD (PPD) is the actual probability of company defaulting within the given period of time. It is purely a theoretical concept as no one really knows what this probability is. We could estimate it using some models or credit ratings, but those ...

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there is no standard approach to model quanto CDS. In practice, people look at the dynamic hedging costs over time as well as the expected loss from an fx gap in the event of a default of the ref entity. the former is modelled by some correlated brownian (for FX) and mean-reverting processes (for credit - could be Ornstein Uhlenbeck for example). In ...

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I urge you to not compare CDS contracts and pairs with cash equity pair trades. The profiles are entirely different. CDS pairs are much more similar to being long and short an options contract. As protection buyer you are essentially long an option, you pay an "insurance premium" and that is what you are standing to lose at maximum. However, as protection ...

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Here is a link to a very interesting paper about the subject. The model assumes lognormal intensities (I think to ensure non-arbitrage as default probability must always be between 0 and 1, which is not the case if we assume Gaussian process for the intensity) deterministic FX volatility correlation between FX and the intensity a jump in the FX spot in the ...

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Your transition matrix $M$ has a time horizon associated with it, typically one year but sometimes 3 months or 5 years. Assume for convenience the horizon is 3 months. If it is not, you may wish to take a matrix square root to turn it into a 3 month matrix. Now the 6 month transition probabilities are formed by multiplying the matrix with itself, \$ M ...

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You should use the ratings-based default probabilities to derive the "fair" spreads on a set of hypothetical new contracts and compare this result to the market spreads. Each could then be used independently to also derive the price for an existing CDS. There is no set way to combine the two prices, as these are two completely different and independent ...

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Well I m affraid that there is a little bit of confusion here. Ratings are ... Ratings usually when used by notation agencies they imply a definite fixed once for all default probability (or transition matrix to some other rating) and then issuers are classified among those ratings usually by using some historical data. When using CDS spread then you get ...

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The consensus seems to be is using jump diffusion process (affine), and then using copula's and/or correlated brownian motions to handle the correlation structure. Here's a link to a recent paper that discusses these models in great detail, and includes application of these models for modeling quanto cds: ...

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Not sure how you're looking to use it, but if you start with an IMM date in cell A1 (e.g. 9/18/2013), in cell A2 put... =DATE(YEAR(A1), MONTH(A1) + 3, 1 + MOD(4 - WEEKDAY(DATE(YEAR(A1), MONTH(A1) + 3, 1)), 7) + 14) ...and drag it down. It will return the 3rd Wednesday of the month for every third month, so assuming that the month of the date you put in ...

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Markit is a pretty good source for CDS information, and their prices are pretty much the standard the industry goes by. Your best bet for finding large spreads would be to look at some of the European Banks or possibly TEPCO after the Japan Tsunami. Derivatives by default aren't "standard," the instruments are designed to be flexible, but the closest ...

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This take into account three components: Dynamic model for hazard rates (and thus cds). The dynamic is chosen to be lognormal (so it is always positive and arbitrage free) with constant volatility and mean reversion. The FX spot follows a BS dynamic with Jump at time of default. More complex dynamic for the model are not essential given that quanto CDS is ...

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