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edited Apr 15, 2021 at 12:14

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I'm trying to calculate the historical P&L of a CDS trading strategy, and am struggling to come up with the up-front payment of the contract. From what I can tell, the Mark-to-Market value of a contract is MtM =(S(p) −C)×RPV01 where S(p) is the market spread and C is the coupon (either 1% p.a. or 5% p.a.).

I'm having trouble following the calculation for the RPV01 following the ISDA pricing manual and instead found this gem of an answer:

A simple model for the value of a short protection CDS can be found if you write

V = (C-S) x RPV01, where

RPV01 = (1−exp(−gT))/g (1−exp(−gT))/g

and C is the coupon, S is the par CDS spread, T is the remaining life in years and

g=r+S/(1−R) where r is the risk-free (Libor) rate and R is the expected recovery rate, usually set to 40%.

If I set r=0.02 and T=5 for a notional of 10M USD then I get V equal to -144,317USD. So to enter into this contract I would receive an upfront payment of 144,317USD.

My question is whether this is a rough estimation, or generally quite accurate? Is there another straightforward way to compute the RPV01 of a contract and thereon the MtM value/up-front payment?

I'm having trouble following the calculation for the RPV01 following the ISDA pricing manual and instead found this gem of an answer:

A simple model for the value of a short protection CDS can be found if you write

V = (C-S) x RPV01, where

RPV01 = (1−exp(−gT))/g (1−exp(−gT))/g

and C is the coupon, S is the par CDS spread, T is the remaining life in years and

g=r+S/(1−R) where r is the risk-free (Libor) rate and R is the expected recovery rate, usually set to 40%.

If I set r=0.02 and T=5 for a notional of 10M USD then I get V equal to -144,317USD. So to enter into this contract I would receive an upfront payment of 144,317USD.

My question is whether this is a rough estimation, or generally quite accurate? Is there another straightforward way to compute the RPV01 of a contract and thereon the MtM value/up-front payment?

I'm having trouble following the calculation for the RPV01 following the ISDA pricing manual and instead found this gem of an answer:

A simple model for the value of a short protection CDS can be found if you write

V = (C-S) x RPV01, where

RPV01 = (1−exp(−gT))/g

and C is the coupon, S is the par CDS spread, T is the remaining life in years and

g=r+S/(1−R) where r is the risk-free (Libor) rate and R is the expected recovery rate, usually set to 40%.

If I set r=0.02 and T=5 for a notional of 10M USD then I get V equal to -144,317USD. So to enter into this contract I would receive an upfront payment of 144,317USD.

My question is whether this is a rough estimation, or generally quite accurate? Is there another straightforward way to compute the RPV01 of a contract and thereon the MtM value/up-front payment?

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asked Apr 15, 2021 at 11:57

germany

Calculating RPV01 for the up-front payment of a CDS contract

I'm having trouble following the calculation for the RPV01 following the ISDA pricing manual and instead found this gem of an answer:

A simple model for the value of a short protection CDS can be found if you write

V = (C-S) x RPV01, where

RPV01 = (1−exp(−gT))/g (1−exp(−gT))/g

and C is the coupon, S is the par CDS spread, T is the remaining life in years and

g=r+S/(1−R) where r is the risk-free (Libor) rate and R is the expected recovery rate, usually set to 40%.

If I set r=0.02 and T=5 for a notional of 10M USD then I get V equal to -144,317USD. So to enter into this contract I would receive an upfront payment of 144,317USD.

My question is whether this is a rough estimation, or generally quite accurate? Is there another straightforward way to compute the RPV01 of a contract and thereon the MtM value/up-front payment?