Hello everyone,
Can someone explain why CDS premium is approximately = (Credit spread - Fixed coupon)*Duration
What is the rationale behind this formula?
It’s like buying and selling an insurance or call option whereas buyer receives a payment if credit event occurs thus buyer pays protection premium to seller. It’s based on notional value and duration expresses a premium payment frequency.
Hi,
I understand how CDS works. So the premium is the present value difference between the protection and the premium leg right? From there how did we arrive at the formula (Credit spread - Fixed coupon)*Duration?