I am looking to understand the ISDA CDS Pricing Model for a 1Y "Buy Protection" CDS with Coupon = Quoted Spread = 100bp. Numbers are from Bloomberg.

Cash-Flow Matrix

Payment Date   Cashflow   Disc Factor   Survival Prob   Disc Cashflow
2019-09-20      -25,556    1.00053407          99.77%         -25,511
2019-12-20      -25,278    1.00144026          99.35%         -25,151
2020-03-20      -25,278    1.00219607          98.94%         -25,064
2020-06-22      -26.733    1.00283466          98.51%         -25,521
TOTAL --------------------------------------------------     -101,247


Accrued        -11,944
Premium Leg    -89,502  (= Sum of CashFlows - Accrued ≈ -101k + 12k)
Default Leg     89,502 

Principal            0  (= Sum of Premium Leg + Default Leg)
Cash Amount    -11,944  (= Sum of Principal + Accrued)

As I understand it, the Flat Hazard curve is calibrated to make Principal = 0 (zero in this example since coupon = spread). Questions:

  • It seems we calibrate minus the accrued on the premium leg, and then add it back to the Principal to get the actual Cash Amount. This double-usage seems confusing. Is this correct?
  • Assume every day we have spread = 100bp and thus Principal = 0, the resulting Premium Leg is still changing every day by the daily accrued amount. So the hazard rate will change a little bit every day to compensate for this? Despite the quoted spread never changing.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.