# 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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For an individual firm, a theoretical model of the capital structure was developed by Robert Merton in 1974. The simplest form of this model assumes the firm has zero-coupon debt maturing at some future time $T$. Default is defined as the condition where the value of the firm's assets fall below the outstanding debt. The firm equity is viewed as a call ...

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I could not find any such detailed documentation after some weeks of looking (not non-stop obviously). It is appallingly documented. I do understand fully what it does though so am happy to field some questions on it if you like. In a nutshell, I can tell you it is a standard reduced-form credit model under a constant hazard rate (i.e. homogeneous Poisson ...

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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, $M ... 2 You should use the ratings-based default probabilities to derive the "fair" spreads on a set of hypothetical new contracts and compare this result to the market spreads. Each could then be used independently to also derive the price for an existing CDS. There is no set way to combine the two prices, as these are two completely different and independent ... 2 Well I m affraid that there is a little bit of confusion here. Ratings are ... Ratings usually when used by notation agencies they imply a definite fixed once for all default probability (or transition matrix to some other rating) and then issuers are classified among those ratings usually by using some historical data. When using CDS spread then you get ... 2 The consensus seems to be is using jump diffusion process (affine), and then using copula's and/or correlated brownian motions to handle the correlation structure. Here's a link to a recent paper that discusses these models in great detail, and includes application of these models for modeling quanto cds: ... 2 It depends on how one is thinking about the hedge. One might be thinking of it as A hedge against catastrophic risk (default of the issuer), or A hedge against changes in (market-implied) default intensity or hazard rate In the former case, which seems to be how you are considering it, the hedge is a static hedge, kept for up to 5 years, and insulates ... 2 A friend gave me the following reply in terms of dynamic hedging and portfolio management: Quantitative justification Pricing models for a CB are based on holding the CB hedged with a short equity position. The combined portfolio has zero delta. However, it has positive gamma. To see this, consider that delta increases when the probability of conversion ... 2 An implied correlation$\rho_i(k_1,k_2)$is a correlation that matches the$(k_1,k_2)$tranche price$P_{k_1}^{k_2}$(usually computed under a gaussian or student t copula) $$C(k_1,k_2,\rho_i(k_1,k_2)) = P_{k_1}^{k_2}$$ For mezzanine tranches, there can sometimes be two different implied correlations matching the tranche price. A base correlation ... 2 Most, but far from all, companies maintain a relatively steady debt load. When a bond matures, they fund its principal payout with a new bond. Sometimes companies do take on more and more debt, meaning that CDS protection sold during earlier times of small debt loads becomes more valuable (and underpriced, from the point of view of the protection seller). ... 1 RRL's answer is entirely correct in terms of the theoretical reason underpinning the relationship between equity IV and CDS spreads. "CDS spreads are not “pure” default risk compensation" - no they are not since the ISDA Quoted Spreads assume a homogeneous Poisson process (implying that instantaneous default risk is a constant over the life of a contract) ... 1 The relationship between volatility and CDS is very interesting. Volatility in finance is synonym of risk. There are many aspects of volatility. There are 2 primary ways to find CDS premium, one is using structural model and the other is reduced form or intensity based model. Structural models use equity valuation, outstanding debt and equity volatility to ... 1 There is no such thing as a "proper" interpolation of CDS spreads. The only criterium your interpolation must obey is the absence of arbitrage. Note that, assuming that$spread(3M) < spread(6M)$,$spread(4M)$can take any value between$spread(3M)$and$spread(6M)$without creating an arbitrage opportunity (actually it can be even slightly less than ... 1 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 ... 1 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 ... 1 A simpler solution I found is to discount the differences between current spread and original spread:$MV_{CDS}=T \cdot (s_0 - s_t )\cdot \sum_{i=1}^{T}{e^{-r\cdot i }}\$

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I'm not expert. However, it seems clear that you're generating an upper bound on the seller value. You have to model the risk of default, as well as any convenantal terms for structured default, to generate an expected payout rate, and deduct that from the DCFs, to get a more realistic value. If the terms include a swap put model that separately. To set a ...

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According to the data spec, currencies published only include USD, GBP, EUR, JPY, CHF, CAD, AUD, NZD, SGD, and HKD.

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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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