12 votes

How to interpret the 'price' of a CDS?

A CDS is a contract with a protection leg that pays (100%-Recovery) immediately following a credit event if it happens before maturity, and a premium leg in which a coupon of 100 bps is paid until a ...
  • 2,049
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 ...
  • 1,142
7 votes
Accepted

What is a Constant Maturity Swap (CMS) rate?

A constant maturity swap (CMS) rate for a given tenor is referenced as a point on the Swap curve. A swap curve itself is a term structure wherein every point on the curve is the effective par swap ...
7 votes

How can I learn stochastic process & stochastic calculus in two weeks?

This is impossible unless you are very intelligent with good memory-retention skills and already mathemathically proficient in the field of analysis and statistics (and no, a single course in basic ...
  • 91
6 votes

What is a Constant Maturity Swap (CMS) rate?

In simple terms: An ordinary swap might be a 10 year swap of Libor vs a fixed rate; this fixed rate is determined in the marketplace every day and is published by Reuters, Bloomberg etc. as the '10 ...
  • 9,202
6 votes

How to interpret the 'price' of a CDS?

A spread of 132 means that buying the protection will cost you 132 bps per year up to the default or the maturity with no upfront. Because of standardisation of the coupons, there is an upfront. So ...
  • 2,382
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 ...
  • 741
5 votes

What is a Constant Maturity Swap (CMS) rate?

In a vanilla swap, the IR on the floating leg usually depends on the reset period/swap frequency. If frequency is 6m, 6m LIBOR is used for reset, 3m LIBOR for quarterly resets etc. In a floating CMS ...
5 votes
Accepted

"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 ...
  • 5,477
5 votes

Difference between FRA and a zero coupon swap

A forward rate agreement is an agreement to exchange a fixed for a floating rate over one period, with the payment being made at the start of the period. A zero coupon swap (with both legs paid at ...
  • 5,658
5 votes
Accepted

Value (price) of defaultable zero coupon bond with credit risk involved

There are a few recovery mechanisms, for example, recovery of par (i.e., the notional), recovery of treasury (i.e., the recovery value is a constant fraction of the equivalent default-free bond), and ...
  • 20.5k
4 votes
Accepted

Clarification on how synthetic CDOs work

You are right in that a synthetic CDO comprises a basket of CDS. Like cash CDOs, this is a way to take a long or short position in a basket of credits. In a cash CDO, the issuer creates a basket of ...
  • 5,477
3 votes
Accepted

<Credit Default Swap> Auction Recovery vs Fixed Recovery

How is the CDS settled if the credit event happens? Physical settlement (used to be prevalent in the early days, the 1990s) means that the protection buyer gives the protection seller the reference ...
3 votes

Why do CDS Spreads differ by currency?

For that you might separate the question for two types of CDS : 1- Quanto CDS where the reference obligation is in a different currency. For that, you've had excellent answers. 2- CDS where the ...
  • 436
3 votes
Accepted

Mark to Market of a CDS Contract and Risky Annuities

ok so if you sell a CDS for 100bp and then the market moves to 90bp, you have a profit of 10bp. But how much is that actually worth in dollar terms? Suppose you then buy the CDS for 90bp, what have ...
  • 14.5k
3 votes
Accepted

Accrual in Default Derivation of Credit CDS Curve

The formula for the accrual on default $$ S_n \sum_{i=1}^n \frac{\Delta_i}{2}(Ps(i-1)-Ps(i))DF_i $$ is just an approximation that says conditional on default occurring within period $i$ (probability ...
3 votes

Accrual in Default Derivation of Credit CDS Curve

The accrual on default is like the accrued interest on a bond. A credit default swap can be looked as a synthetic bond. As such, with each passing day, interest is earned to the seller of protection ...
  • 5,477
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 (...
2 votes

What is a Constant Maturity Swap (CMS) rate?

The other answers explain the structure but they do not appear to address your follow up questions in the comments regarding the naming of a constant maturity swap (CMS). While it is true that the ...
2 votes

Importance of z-spread in CDS-Bond Basis trading

Z-spread is a valuation tool. It's not traded but is used as a measure of relative value.
2 votes

CDS Vs Credit Risk premium over risk free

In theory, it should indeed be equal as holding a bond $B_t$ from some company $X$ as well as paying on a CDS written on the bond should earn you the risk-free rate, given the CDS hedges the default ...
2 votes
Accepted

Fixed coupon for CDS index

Coupons are there to reduce the counterparty risk between the seller and the buyer. If you didn't have that 500 bp coupon on a high yield bond the protection buyer would have to make a big payment ...
  • 2,878
2 votes

Accrual in Default Derivation of Credit CDS Curve

Simply speaking, as mentioned by Antoine, the accrual arises because default may happen between two payment dates and the accrued payment should be paid. $\Delta_i$ is the year fraction. Since $S_n$ ...
2 votes

Are Credit Default Swaps used by B2B Service providers or Vendors?

A CDS would not be a good instrument to hedge this kind of credit risk for the following reasons: 1 CDS is traded by two counterparites that have an ISDA agreement. Most participants in this space ...
2 votes
Accepted

Are Credit Default Swaps used by B2B Service providers or Vendors?

Maybe some do but I believe it’s rare because it’s not practical: CDS are traded for a limited amount of companies and CDS might not protect against late or non payment. What is more commonly done is ...
  • 7,739
2 votes
Accepted

Basic CDS terminology

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 ...
2 votes

Does credit default swaps have interest rate duration and credit duration?

Most credit default swaps are quoted as CDS spread (the fraction of the notional that the protection buyer would pay every year for a given CDS maturity). However the contract that's actually traded ...
1 vote

Value (price) of defaultable zero coupon bond with credit risk involved

It's hard for me to understand exactly what you are asking, but I will try to answer. If my answer misses the mark please clarify exactly it is what you don't understand and I will try again. We have \...
  • 456
1 vote

CDS time series construction

Almost all CDS trades are cleared through DTCC, which knows at what level something has traded. You can see some of their summary data for free https://www.dtcc.com/repository-otc-data . But the ...
1 vote
Accepted

CDS Quote Conversion - Quoted vs Par

The reason the spreads were off is that the data came from MARKIT, and MARKIT often includes a 3M spread (but does not always publish it). So the 3M Quoted Spread and 3M Par Spread are exactly the ...
  • 1,142

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