# Tag Info

12

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 credit event or maturity. Hence the value of $1 a short protection (receiving spread) contract is V = 100 bps x PV of$1 per year paid to sooner of a credit ...

8

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 clearly have an effect on the EUR as a whole, i.e. the EUR will weaken. So if you are insuring against Italy defaulting you really don't want your insurance ...

7

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 probability theory does not suffice). And even if you are, two weeks is an extremely short amount of time. However, assuming these criteria are satisfied, I would ...

6

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 year swap rate'. Once you enter into the swap this rate remains fixed for you, of course, that is why it is called a fixed rate. But every day Reuters publishes a ...

6

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 rate for that tenor. This is analogous to a 3m LIBOR curve represents 3m forward rates for a given tenor. A swap rate can be considered as a weighted-average of ...

6

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 if the spread is 132 and if the coupon is 100bps, and if you buy protection you will pay something upfront because 132bps is what you should have paid per year ...

5

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 the act of closing the old contract and opening the new contract. The maturity of the CDS is typically much longer, with 5Y being the most commonly traded tenor. ...

5

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 leg, the rate used is the CMS rate, regardless of the reset frequency e.g: 10yr CMS leg will use the 10 yr CMS rate, regardless of whether the reset happens semi-...

5

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 the 5Yr synthetic debt of the reference entity at a credit spread of 190bps. I assume that the reference entity and the sovereign where the company is domiciled ...

5

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 recovery of market value (i.e., a fraction of its pre-default market value). Here, your formula, which is also called the Lando formula, assumes the recovery of ...

5

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 maturity) is an agreement to exchange a fixed for floating rate over one or more periods, with the payments being made at the end of the final period. So the two ...

3

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 obligation (or another debt security pari passou with the ref ob), and the protection seller pays the protection buyer the notional face value. (similar to ...

3

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 reference obligation currency is the same as the CDS currency but different from the domestic currency of the issuer. For this here my contribution : One of ...

3

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 you got? You have 10bp per annum until the reference entity defaults, which is worth 10bp * the Risky pv01 of the contract. Hope that explains it. The ...

3

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 (similar to a holder of a bond). The accrual is due to the seller of protection (holder of the bond) but has not been paid since interest is paid on a ...

3

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 (maturing on IMM dates 4.5, 4, 3.5, etc years from now) are much less liquid with wider bid-ask spread than on-the-run one. In 2012 Bruno Iksil (aka London Whale) ...

2

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

2

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 risk of your bond. In practice, there is a CDS-bond basis, which is equal to: $$\text{Basis}_{\text{ CDS-Bond}} = \text{Premium}_{\text{ CDS}} - \text{Spread}... 2 Coupons are there to reduce the counterparty risk between the seller and the buyer. If you didn't have that 500 bp coupon on a high yield bond the protection buyer would have to make a big payment upfront then wave it goodbye when the protection seller defaults. It also helps standardizing contracts (same quarterly payments whatever the spread you entered ... 2 The formula for the accrual on default$$ 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 of $Ps(i-1)-Ps(i)$), defaults occurs on average in the middle of the period, thus the $\frac{\Delta_i}{2}$ average accrual time from beginning of period to ...

2

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 don't. 2 CDS are traded on a relatively small number of most liquid corporate reference entities. If you want to trade a CDS on an illiquid name, it would be ...

2

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 that vendors buy trade credit insurance from insurance companies such as Euler Hermes, Coface or Atradius. Disclosure: I work for Atradius.

2

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 of where the CDS comes from: Expected Loss = Probability of Default * (1 - Recovery Rate) * Default Exposure. The expected loss is the CDS premium you have to ...

1

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 \begin{aligned} P(\tau \leq t + dt \vert \tau > t) &= \frac{P(t < \tau \leq t+dt)}{P(\tau > t)} \\ &= 1 - \exp \bigg(\int_t^{t+dt} ...

1

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 markets sometimes move fast and not every credit is traded every day, on the contrary. Knowing the level at which some credit last traded a few weeks ago may not be ...

1

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 same (but unfortunately invisible). And therefore Par and Quoted for >3M will not be exactly the same.

1

There are two kinds of credit risk: jump to default (JTD) and the CDS spread delta (CS01). If you're long a corporate bond, and you bought CDS protection on the sovereign, and the corporate bond defaults, then you don't have an effective JTD hedge. So let's just focus on CS01 hedge. Assume for simplicity that all the bonds are USD-denominated and that you ...

1

@AlRacoon was completely right by suspecting convexity for this issue. The Chart below shows the impact of the convexity in this trade very well.

1

Thank you for your answers! I have found a currently published paper that analyses this explicit case: https://arxiv.org/abs/1512.07256 Conclusions and Further Work We analysed default–driven FX devaluation jumps as a modelling mechanism. These can be used to explain the basis in credit default swaps offering protection on the same entity but in different ...

1

First, please note that in a standardized credit default swap, you do not pay (in your example) 750 bps every year for protection. The 750 is just a "market standard quote" (MSQ), but you pay every year a standard "running spread" (usually 100 bps; for high-yield credit it might be 500 bps) (with 4 payments a year on standardized dates: March, June, ...

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