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Credit Derivatives – CDS Valuation

CDS pricing is theoretically straightforward – whatever is paid as protection premium should be offset by the expected gains from contingent default payments. However, calculating the present values of these payments involves more subtle assumptions about default probabilities and recovery rates. There must also be some method for calculating the fair value of the upfront payments generated by differences between theoretical spreads and fixed coupons.

 

This course outlines the key calculations in CDS pricing and shows how valuation has coalesced around standard pricing models and simplified assumptions.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Identify the role of the credit triangle in pricing credit spreads

    Recall how credit default swap pricing is broken into the valuation of protection and default streams

    Recognize how the risk-neutral default probabilities and recovery rates generated by standard pricing models are convenient rather than accurate

  • COURSE OUTLINE

    Topic 1: Overview of CDS Pricing

    The Credit Triangle & Single Period Pricing

    Binary Outcomes

    Present Value of Payment Legs

    Spread Payments

    Accrued Interest

    Topic 2: Default & Survival Probabilities

    Overview of Default & Survival Probabilities

    Default & Survival Probabilities: Example

    Survival Probability: Formula

    Hazard Rates

    Default Intensities

    Topic 3: Other Pricing Factors

    Upfront Payments

    Standard Coupons

    Changing Default Intensities

    CDS Calculators

    Recovery Rates

    Risk-Neutral Pricing

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    60 Minutes

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