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Postby nivethasridhar3 » Tue Apr 26, 2016 12:46 pm

Please explain logic for the formula of upfront premium.

Upfront premium =( credit spread- fixed coupon)* duration

How so?


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Re: Derivatives

Postby edupristine » Sat May 07, 2016 6:38 am

Hi Nivethasridhar

CDS pricing involves using credit spreads to infer the cost of the protection. From this point of view, and, using the term “coupons” to refer to the premium payments.
from the CDS buyer to the CDS seller, we find the following can be used as an estimate

Upfront premium required  PV(Credit spread) – PV(Fixed coupons)
Upfront premium  (Credit spread – Fixed coupon) × Duration of CDS

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