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
8
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 ...
- 101
6
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 ...
- 21.3k
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 ...
- 5,971
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 ...
- 6,672
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
4
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 ...
- 6,672
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 ...
- 6,672
4
votes
Accepted
Does value of a TRS only involve past price movement and not expected returns?
TRS are just financing trades. The dealer is charging you to place the asset on their balance sheet. So if you are receiving total return on stock A, you will receive appreciation and dividends over ...
- 6,672
4
votes
Does value of a TRS only involve past price movement and not expected returns?
Yes. The value of the asset leg is just the value of the asset itself, because the TRS can be perfectly replicated by owning the asset. Alternatively, you could say that whatever the potential ...
- 17.9k
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 ...
- 13.2k
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 ...
- 446
3
votes
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 ...
- 1,052
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 ...
- 17.9k
3
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 $S_n$ ...
- 198
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 ...
- 5,702
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
what is the index to measure the credit volatility
The CBOE has recently launched four new daily measures of implied volatility for CDX NAM IG (VIXIG - North American investment grade), CDX NAM HY (VIXHY - North American high yield), VIXIE iTraxx ...
- 13.2k
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 ...
- 21
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.
- 971
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 ...
- 8,229
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 ...
- 2,908
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 ...
- 13.2k
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 ...
- 8,620
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 ...
- 971
2
votes
Accepted
Understanding Asset Swap Spread Example
All the floating coupons are daycounted. Note that it says Floating Basis: Actual/365. (This is the usual daycount convention for GBP and some other currencies, but for USD the usual daycount ...
- 13.2k
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 ...
- 13.2k
2
votes
Why these formulas for Bond Total Return Swap valuation are different on handling recovery
A bond Total Return Swap has three sources of inflows:
Changes in value of the bond ("return leg")
coupons from the bond and principal repayment at maturity ("bond cash flows")
...
- 1,540
1
vote
Calculating RPV01 for the up-front payment of a CDS contract
No, this is a very rough approximation, ignores convexity.
Consider this: if some CDS spread changes from 30 bps to 31 bps, it's a much bigger deal than if it changes from 300 bps to 301 bps.
You ...
- 13.2k
1
vote
Implied funding/repo rates from Credit Default Swaps
I recall that in 2002, when Lula won the Brazilian presidential election, and was later inaugurated, most of the market participants assumed that Brazil would default on its sovereign debt, as ...
- 13.2k
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