I have a few questions on CDS and especially sovereign ones:
- I've read that usually CDS are generally traded in millions of notional value, which means that not everybody can purchase sovereign CDS, but who will ? Banks, other countries, ... ?
- Another thing that is a bit unclear, let's say a CDS is bought at day D with maturity T and at X bps. But at day N when the next premium is due the CDS is at Y bps. This premium is based on X bps or Y bps? (it would make more sense to me that it would be Y bps but I'm not 100% sure)
- I've seen many different formulae for the CDS spread and pay-off, are the following formulae accurate?
- CDS Spread = n-Year Bond Yield – n-Year Risk-free Yield
- CDS Payoff = Notional Principal × (1 – Recover Rate)