Credit Strategies Level III

CFA Level III Fixed Income
#1

Two questions:

a. for the first image, wouldn’t the coupon paid be the difference between CDS spread and the fixed spread? i.e. 175bps - 100bps

b. for the second image, why didn’t we solve the CDS contract price change using the % change CDS price formula = -(SD of CDS * change in CDS spread)*Notional

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image791×795 163 KB

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image790×587 125 KB

#2

Three formulas related with CDS:

  1. CDS premium=(CDS spread-fixed coupon)*effspreadDur(cds)
  2. CDS price = 1- CDS premium
  3. change in CDS price = - change in CDS spread * effspreadDur(cds)

a. the fixed coupon received is 1%*notional. The CDS spread is the premium you should pay for the protection , the fixed coupon is like the ongoing premium thus the difference between CDS spread and fixed coupon is the premium you pay upfront which is CDS premium.
b. The answer calculate the change in CDS price (0.94779-0.9349) first and then multiply the notional (100,000) equals 228,940. It is using the % change CDS price formula = -(SD of CDS * change in CDS spread)*Notional to calculate the CDS contract price change.