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Credit Derivative Strategies: New Thinking on Managing Risk and Return by Rohan Douglas

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CHAPTER 9
CDS Valuation
SANTA FEDERICO, ANDREA PETRELLI, JUN ZHANG, AND VIVEK KAPOOR
 
 
 
We start with terminology widely used to describe a single-name
CDS. To focus on the basic risk concepts, we work with an idealized continuous payment case without addressing the term structure of interest rates or credit spreads.
Symbol and Units Description
r [1/t]Default, risk-free interest rate
T [t]Maturity of bond or CDS
N[$]Notional
s [1/t]Spread over risk-free rate paid to risky bond investor
ŝ[1/t]Continuous CDS spread paid by purchaser of default protection
R Fraction of notional recovered in the event of default
λ[1/t]Risk-neutral default hazard rate
ftd (τ/ λ)[1/t]Risk-neutral probability density function of time to default
Ftd (τ|λ)Cumulative risk-neutral ...

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