15
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How to compute the implied probability of default from a CDS spread?
I believe the answer can be further improved for all those being directed here by google after 3 years.
A common way to model the default probability is by the hazard rate. As @Bob correctly mentions, ...
- 343
12
votes
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Reliability of CDS indices?
The indices have different quoting conventions.
The way that a CDS index is traded is that you pay a fixed amount per year for protection in case of default (100 bps for IG, 500 bps for HY) and ...
- 5,971
11
votes
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Recovery Rates in CDS valuation
Apparently, you refer to this passage from Prof John C. Hull (11th edition, 2021):
It's confusing because Hull is referring to the market conventions before the "Big Bang". This is no ...
- 13.2k
8
votes
Why do CDS Spreads differ by currency?
Firstly, have a look at this TwoSigma article:
What Sovereign CDS Spreads Potentially Tell Us about Currency Risk
To elaborate, if a country in the Euro Zone (like Italy) defaults, then this will ...
- 1,052
7
votes
Why was CDS-bond basis close to zero before the financial crisis?
You and the paper are both correct.
Funding was not free before the GFC, but the funding cost of both positions then was almost equal, generating almost-zero basis.
Since then, holding physical bonds ...
- 5,141
5
votes
What does "rolling" for a CDS contract mean?
For CDS indices, a new series is created every 6 months (3/20 and 9/20). With each new series, the basket of reference entities will generally change, with some names replaced by others. Rolling is ...
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5
votes
Do CDS have interest rate exposure?
So as per my comments, the answer is yes. It's all about which leg is dominant, the loss payment, or the premium, if any. If you're short risk (bought protection) vs paying premium, then if the ...
- 543
5
votes
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Why z-spread differs from CDS spread in 1 period example
The CDS spread costs you 11.7% in order to ensure that the holder gets the remaining 60% of principal and interest in return. In the end, the payment you are getting in default is 60%-11.7% = 48.3%. ...
- 719
5
votes
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Properties of an iTraxx index
The European iTraxx indices trade 3, 5, 7 and 10-year maturities, and a new series is determined on the basis of liquidity every six months.
For the total return index : The regular roll process from ...
- 2,908
5
votes
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"Where is my money": CDS Sensitivities, Spreads and PnL Calculations
You would need to provide more details for an accurate PnL attribution. However, here are some additional points to consider that might help.
When you sold protection, you effectively became long ...
- 6,672
5
votes
Hedging a CDS sold
If it is a single name CDS, the transaction leaves the bank short the credit spread of that bond vs a risk-free bond in the same currency.
To go long the spread, the bank would i) buy the same CDS ...
- 1,671
5
votes
CDS currency and reference obligation currency
A reference entity (the debtor that might have a credit event) does not have any currency denomination.
A reference entity might have many outstanding debt instruments. Each instrument is denominated ...
- 13.2k
5
votes
Accepted
CDS Option pricing in quantlib python
First, the error is because you should input the cds_vol as a quote.
So instead of cds_col use ...
- 5,895
5
votes
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Debt seniority and probability of default
A CDS contract has a "reference entity" (obligor, bond issuer) and a "reference obligation" (the specific bond that needs to default, rather than a tier). Read https://www.isda.org/...
- 13.2k
4
votes
Credit Valuation adjustment (CVA) Hedges
To continue from uness' answer (edit: just seen the OP was very old, but will leave here anyway!) . The greeks will be every element of market risk to which the the CVA is sensitive. Writing in words ...
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4
votes
Credit Valuation adjustment (CVA) Hedges
CVA is a price. Just like any price, you compute its sensitivities (greeks) and then use financial products to bring them as close to zero as possible.
It's not possible to derive a hedging strategy ...
- 2,280
4
votes
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Is a CDS spread a spread in a typical sense
Regarding the terminology, there is no relation between CDS spread and bid/ask spread. The term spread in this sense refers to the related difference (spread) of the effective (credit risky) interest ...
- 206
4
votes
Return on a CDS portfolio
There are a number of ways you might consider it:
1) As an investor (speculator) you may be required to post collateral that permits the holding of the position. What is your return relative to the ...
- 12.1k
4
votes
Reason for stale sovereign CDS spreads (e.g. Greece)
Reuters is not a good source of data. (Maybe try Markit?)
Greece had a "credit event" in 2012. An ISDA auction determined how much a defaulted bond was worth, all CDSs were cash-settled using the ...
- 13.2k
4
votes
Accepted
CDS ISDA model/Bloomberg
The isda-engine.py example in the QuantLib-SWIG distribution reproduces Markit prices within fractions of cents.
- 8,043
4
votes
Expected currency depreciation given sovereign default
I have actually looked into this a lot and I don't have a full answer.
You can (sort of) see what the market participants think by looking at the consensus "quanto factors" published monthly by IHS ...
- 13.2k
4
votes
CDS volatility: daily return calculated by simple substraction (Pt - Pt-1)?
If I understand correctly, you are looking for the volatility of the daily change in the mark to market of a credit default swap. You are given a daily series of CDS spreads (market standard quotes, ...
- 13.2k
4
votes
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Reproduce CDS Index Default Probability via Tranche [0,100] Probability
It is actually that you forgot your $1 - R$ in formula (2) :) The index survival curve is defined similarly to the tranche's : $Q\left(t\right) = 1 - \mathbb{E} \left[L\left(t\right)\right] = 1 - \...
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4
votes
Can I calculate the CVA or DVA over a sovereign portfolio?
CVA stands for Credit Valuation Adjustment and should be applied to derivatives and not bond portfolios.
The reason is that unlike derivatives, a bond has the counterparty credit quality implicitly ...
- 5,895
4
votes
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Objective probability of default from CDS spread
(Bloomberg and Reuters News are fond is reporting that some name is trading at some such CDS spread, "which implies N% probability of default". They neglect to mention what recovery ...
- 13.2k
4
votes
Survival probabilities starting from CDS spreads
OK, here is a simplified demonstration:
Before we consider swaps, let us consider very simple bonds. Suppose that you have a choice of two zero-coupon bonds. A riskless one costs 95 and is certain to ...
- 13.2k
4
votes
Accepted
Different types of swaps and generalized pricing structure - correlation swap, variance swap, volatility swap, gamma swap, etc
For Variance Swaps (and Vol swaps with some caveats), the Black Scholes model is the main tool used for pricing. It is just less obvious.
Using your example, options are not priced with S-K or K-S ...
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4
votes
CDS spread changes with its recovery rate
Whether you want the different recoveries to keep the constant hazard rate (equivalently probability of default, probability of survival) or constant mark to market (upfront) depends on why you're ...
- 13.2k
3
votes
CDS Indices Query
Every 6 months, there is a new series of an index (usually with slightly different names). The "on the run" series (maturing on IMM date 5 years from now) is the most liquid. "Off the run" series (...
- 13.2k
3
votes
Using Euro CDS for a USD transaction
It depends on what you want to do.
First of all, read this article - it's not the same question, but it talks about the same problem that you'll face here. Namely, that when a default event occurs, ...
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