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If I know all the economics of a CDS trade included the Upfront Settlement Fee from the ISDA CDS Model, how can I convert that amount back to Traded Spead? Can some help explain the process?

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    $\begingroup$ This is all explained on the official website: cdsmodel.com/cdsmodel/documentation.html?# under "Standard CDS contract converter specification" $\endgroup$ – Quantuple Feb 9 '17 at 8:34
  • $\begingroup$ Your question is not clear. What is the Traded Spread? Do you want to convert the upfront fee into a par spread that leads to a zero CDS value, or a spread so that the CDS value is equal to the upfront fee? $\endgroup$ – Gordon Feb 9 '17 at 14:31
  • $\begingroup$ Here is real example of what I am looking to achieve. Lets say I only know the following information: Trade Date: 2/9/17 Maturity Date: 12/20/21 Notional: 10mm Fixed Coupon:500bps Upfront Fee: $270,324 and assuming 40% recovery, how could I determine the Traded Spread from this information? I believe we are saying Traded Spread and Par Spread are the same. $\endgroup$ – Chris N Feb 9 '17 at 15:29
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You should check this answer: How to interpret the 'price' of a CDS?

It explains the relation between spread and upfront. In your particular case you might consider using a simple model mentioned at the end of that 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)g=r+S/(1−R)

where r is the risk-free (Libor) rate and R is the expected recovery rate, usually set to 40%.

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  • $\begingroup$ Thank you this information. The issue that I am finding with this equation is that I am trying to solve for S (CDS Spread) and when finding the value for RPV01 the CDS Spread is embedded in the calculation ( by solving for "g"). What is the Libor value here or how would I solve for Libor? $\endgroup$ – Chris N Feb 11 '17 at 4:35
  • $\begingroup$ @ChrisN In your example maturity is in 5 years, so as a risk free rate you might use US treasury bond with 5y maturity. That's right, the equation i ls not directly solvable for S, so you might consider using a numerical method to find a solution for that equation $\endgroup$ – Alexander Feb 11 '17 at 6:33

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