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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 ...


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I have the answer, thanks to none other than Prof. Darrel Duffie, who points out the claim is for floating rate coupon rather than fixed one. Here is the formulation. The coupon of a floating rate bond is the LIBOR rate paid plus a spread. Let $B_i^j$ be the discount factor between time $t_i$ and $t_j$. The LIBOR rate between coupon date $i-1$ and $i$ is ...


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In many years working in the credit markets, I never encountered anyone making an approximation of CDS spread being equal to risky par bond yield. If we approximate CDS coupon payments as a continuous stream $s$, default intensity as a constant $h$, and we assume that discount factors come from a constant risk-free rate $r$, then the CDS pricing formula ...


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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 ...



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