Credit Default Swaps

Bootstrap CDS probability curve, price, and determine CDS spread,

A credit default swap is a particular type of swap designed to transfer the credit exposure of fixed income products between two or more parties. In a credit default swap, the buyer of the swap makes payments to the swap’s seller up until the maturity date of a contract. In return, the seller agrees that, in the event that the debt issuer defaults or experiences another credit event, the seller will pay the buyer the security’s premium as well all interest payments that would have been paid between that time and the security’s maturity date. A credit default swap is, in effect, insurance against non-payment. Tools for analyzing credit default swaps are available in Financial Toolbox™.

Functions

`cdsbootstrap`	Bootstrap default probability curve from credit default swap market quotes
`cdsprice`	Determine price for credit default swap
`cdsspread`	Determine spread of credit default swap
`cdsrpv01`	Compute risky present value of a basis point for credit default swap

Examples and How To

Bootstrapping a Default Probability Curve

In a typical workflow, pricing a new CDS contract involves first estimating a default probability term structure using cdsbootstrap.

Finding Breakeven Spread for New CDS Contract

The breakeven, or running, spread is the premium a protection buyer must pay, with no upfront payments involved, to receive protection for credit events.

Valuing an Existing CDS Contract

The current value, or mark-to-market, of an existing CDS contract is the amount of money the contract holder would receive or pay to unwind this contract.

Converting from Running to Upfront

A CDS market quote is given in terms of a standard spread and an upfront payment, or in terms of an equivalent running or breakeven spread, with no upfront payment.

Bootstrapping from Inverted Market Curves

These examples show bootstrapping with inverted CDS market curves, that is, market quotes with higher spreads for short-term CDS contracts.

First-to-Default Swaps

This example shows how to price first-to-default (FTD) swaps under the homogeneous loss assumption.