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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 ...


4

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. Since the coupon is 5%, this would imply a 5Yr (at the coupon frequency of the ...


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 ...


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

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


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

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.


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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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