R39 Example 2 Credit Default Swaps - Cash settlement Preference

CFA Level II Fixed Income
#1

Reading 39 Example 2 of 2018 material, cash anybody explain the cash settlement process.

I dont understand how the bond holder gets the money from 2 sides

1 - receives payment from the bond seller ( on the basis of Cheapest to deliver concept)

    • again he gets money by selling the bond.
#2

First, he doesn’t get payment from the bond seller (issuer); he gets a payment from the CDS seller.

The amount he gets is the difference between the par value of the bond and the market value of the bond (or the market value of the CTD bond). So if the market value is, say, $200 and the par value $1,000, he’d get $800 from the CDS seller. If he then sells the bond for its market value of $200, he ends up with $1,000: the same as he would have received from the CDS seller if he’d delivered the bond.

1 Like
#3

Thanks , Got your point.

#4

My pleasure.