金融代写|金融数学作业代写Financial Mathematics代考|Single Name Credit Default Swap Valuation: A Review

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金融代写|金融数学作业代写Financial Mathematics代考|Settlement

Depending on the contract specifications, the default event allows the protection buyer:

• To settle physically, which means that the defaulted bond (i.e., the deliverable obligation) will be delivered at par. Physical delivery is still the most common way of settling, according to the 2006 BBA credit derivatives report, representing $75 \%$ of the settlements. Delivery normally takes place within 30 days after the credit event. The Delphi bankruptcy case in 2005 , however, illustrated a disadvantage of physical

settlement. The demand from protection buyers looking to source bonds and speculators anticipating a short squeeze pushed the Delphi bond price severely upwards immediately after the bankruptcy. Pool and Mettler (2007) observed that this caused a disorder in the cash and the derivatives market. Very large-relative to the deliverable bonds outstanding-notional (single name) CDSs’ exposures put protection buyers at risk of not receiving their contingent payment due to the difficulties they experienced in sourcing deliverable bonds.

• To settle in cash, i.e., to receive the difference between par and the bond’s recovery value. Since obtaining quotes for a distressed reference asset is not trivial, cash settlement is less common. If chosen, settlement normally takes place within 5 business days after the credit event. A calculation agent then polls dealers to determine a mid-market price of the reference obligation.
• To receive a preagreed fixed payoff, irrespective of the recovery rate (fixed amount settlement or digital CDS structure) (Figure 1.1).

金融代写|金融数学作业代写Financial Mathematics代考|CDS Rate

Since a CDS is designed as a swap, the parties do not exchange money when entering the contract, but determine the periodic payments in such a way to enter the CDS at zero value. The premium paid is often called the CDS spread. Note that contrary to what the name might suggest, the CDS spread is not quoted vis-à-vis a risk free benchmark such as yield spreads. The term “CDS rate” would therefore be more appropriate. This CDS rate, $s$, is quoted in basis points per annum of the contract’s notional value. The premiums are usually paid quarterly.

Since the protection buyer can deliver the defaulted bond at a prespecified price when the credit event occurred, the CDS rate can be interpreted as a put option premium, paid over the term of the contract. If you have to pay $160 \mathrm{bps}$ for a 5 year CDS on a notional of

$\$ 10$million on Ford, you pay 40 bps (i.e.,$\$40.000$ ) every quarter to insure yourself against the default of Ford.

A bid of 150 bps on a CDS means that the bidder is willing to enter into a long CDS at a rate of 150 bps. An offer of 180 bps represents a seller willing to enter into a short CDS at 180 bps. As always, the offer quotes will exceed the bid quotes.

金融代写|金融数学作业代写Financial Mathematics代考|Reference Credit and the Reference Asset

The reference credit (credit entity, reference entity) is one (or several) issuer(s) whose default triggers the credit event. This can be one or several (basket structure) defaultable issuers. In case of multiple defaultable issuers, the credit event is triggered by the default of $m$-of- $n$ credit entities.

The reference asset is one (or a set of) asset(s) issued by the reference credit (loans, bonds), needed to determine the credit event and the recovery rate.

Using this terminology, Daimler Chrysler could be the reference credit. All senior unsecured bonds issued by Daimler Chrysler with an issue size of minimum $€ 10$ million would be an example of the reference asset.

The ISDA’s Master Agreement launched in 1999, and revised in 2002 and 2003, provides six potential trigger events:

1. Bankruptcy
2. Failure to pay
3. Repudiations/moratorium
4. Obligation acceleration
5. Obligation default
6. Restructuring
In practice, (1), (2), and (6) are most common. Bankruptcy occurs if the reference entity becomes insolvent or when it is unable to repay debt. The precise bankruptcy event needs to be specified in the contract. Failure to pay occurs when the reference entity, after a certain grace period, fails to pay any interest claim or the principal. Restructuring refers to a change in terms of the debt contracts of the reference entity that are adverse to the creditors. This credit event also needs to be specified further in the contract.

金融代写|金融数学作业代写Financial Mathematics代考|Settlement

• 实物交割，即违约债券（即交割义务）将以面值交割。根据 2006 年 BBA 信用衍生品报告，实物交割仍然是最常见的结算方式，代表75%的定居点。交付通常在信用事件发生后 30 天内进行。然而，2005 年的德尔福破产案说明了物理的缺点。

• 以现金结算，即收取面值与债券回收价值的差额。由于获取不良参考资产的报价并非易事，因此现金结算不太常见。如果选择，结算通常在信用事件后的 5 个工作日内进行。计算代理然后轮询经销商以确定参考义务的中间市场价格。
• 无论回收率如何（固定金额结算或数字 CDS 结构），都可以获得预先约定的固定收益（图 1.1）。

金融代写|金融数学作业代写Financial Mathematics代考|CDS Rate

$10百万福特，你支付 40 个基点（即，$40.000) 每季度为自己投保福特违约。

金融代写|金融数学作业代写Financial Mathematics代考|Reference Credit and the Reference Asset

ISDA 的主协议于 1999 年启动，并于 2002 年和 2003 年修订，提供了六个潜在的触发事件：

1. 破产
2. 未能支付
3. 否认/暂停
4. 义务加速
5. 义务违约
6. 重组
在实践中，（1）、（2）和（6）是最常见的。如果参考实体无力偿债或无法偿还债务，就会发生破产。需要在合同中明确具体的破产事件。当参考实体在一定的宽限期后未能支付任何利息索赔或本金时，就会发生支付失败。重组是指参照实体的债务合同条款发生对债权人不利的变化。该信用事件也需要在合同中进一步说明。

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