CDS Value vs Price

CFA Level II Fixed Income
#1

Hi,

In the reading on CDS, the CFAI book says that an increase in credit spread will increase the price of a CDS. Wouldn’t it only increase the value of the CDS assuming that the investor is short (bought the CDS)? I thought the price was 100 - Upfront premium % and that future changes in spread would either decrease or increase the premium. If the spread goes up, the premium goes up as well and the price should decrease. Am I thinking about this the right way?

thanks!

#2

This of a credit default swap as an insurance premium. The more risk the higher the premium. We know that a companies interest rate (and credit spread) will increase as its risk increases. That means that as the spread increases so will the price of buying a credit default swap for that company. In this case price means premium not the value of the CDS.

1 Like
#3

Thank you, makes sense.