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

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 ...


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 ...


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