new to CDS. Few basic questions on terminology and conventions:

If I look at a Sovereign 5-year Chinese CDS then the graph shows a CDS value of 42.520. (Source). Is this 42.52 basis points?

Is it the case the lower the CDS value the "better" the country is doing i.e. the less likely to default (in simplistic terms).

It has a 40% recovery rate (i.e. I get back 40% if there is a default), but how does one then derive a price for the CDS?


Apologies for all the questions!


1 Answer 1


Yes, 42.520bp means its the spread of the CDS.

The lower the CDS, the lower the premium of the sovereign entity and the less likely it will default.

This is overly simplistic but gives you a sense of where the CDS comes from: Expected Loss = Probability of Default * (1 - Recovery Rate) * Default Exposure.

The expected loss is the CDS premium you have to pay for protection to insure default. Think of it as a car insurance. When you buy car insurance, you can specify different coverages. Implicit in these coverages are how much damages (losses) you expect to incur. The higher the coverages, the more you're protected and the higher the premium you pay. As the seller of protection, I am going to charge you a higher premium because.


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