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15 votes

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, ...
Diego F Medina's user avatar
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 ...
Chris Taylor's user avatar
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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 ...
Phil-ZXX's user avatar
  • 1,042
8 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 ...
Dimitri Vulis's user avatar
7 votes

Where to get price data on Credit Default Swaps?

Better than Markit, you can have a look at https://www.datagrapple.com/ (subscription is free). About 1000 CDS are covered. Daily end-of-day prices (mid of a best bid/offer order book) from Jan 2006 ...
mic's user avatar
  • 281
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 ...
demully's user avatar
  • 5,071
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 ...
msitt's user avatar
  • 741
5 votes

Formula to price a CDS Index Option?

You will see a discussion of how to do this in O'Kane's book in section 11.7. It shows that you can adjust the forward CDS index spread in such a way that you can then use Black's swaption pricing ...
Dom's user avatar
  • 2,167
5 votes

Formula to price a CDS Index Option?

A good reference for the valuation of a CDS index option is the paper by Massimo Morini and Damiano Brigo, where they discussed the Bloomberg CDS index option valuation, which is based on Black's ...
Gordon's user avatar
  • 21.1k
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 ...
Mehness's user avatar
  • 533
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%. ...
RandyF's user avatar
  • 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 ...
Lliane's user avatar
  • 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 ...
AlRacoon's user avatar
  • 6,612
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 ...
ZRH's user avatar
  • 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 ...
Dimitri Vulis's user avatar
5 votes
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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 ...
David Duarte's user avatar
  • 5,825
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/...
Dimitri Vulis's user avatar
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 ...
Mehness's user avatar
  • 533
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 ...
byouness's user avatar
  • 2,220
4 votes
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What is the Difference Between a Credit Default Swap and a Bet

The basic idea behind the CDS to provide protection from credit risk to the buyers of corporate bond. They are supposed to be like a insurance product where he buyer of the CDS pay the premium to the ...
Neeraj's user avatar
  • 2,238
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 ...
CFW's user avatar
  • 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 ...
Attack68's user avatar
  • 10.5k
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 ...
Dimitri Vulis's user avatar
4 votes
Accepted

CDS ISDA model/Bloomberg

The isda-engine.py example in the QuantLib-SWIG distribution reproduces Markit prices within fractions of cents.
Luigi Ballabio's user avatar
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 ...
Dimitri Vulis's user avatar
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, ...
Dimitri Vulis's user avatar
4 votes
Accepted

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 - \...
siou0107's user avatar
  • 2,680
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 ...
David Duarte's user avatar
  • 5,825
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 ...
Dimitri Vulis's user avatar
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 ...
Dimitri Vulis's user avatar

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