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The Credit Default Swap Basis by Moorad Choudhry

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APPENDIX II

The Market Approach to CDS Pricing

The market approach to CDS pricing adopts the same no-arbitrage concept as used in interest-rate swap pricing. This states that, at inception,

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Therefore, for a CDS, we set

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The present value (PV) of the premium leg is straightforward to calculate, especially if there is no credit event during the life of the CDS. The contingent leg, however, is just that—contingent on occurrence of a credit event. Hence, we need to determine the value of the premium leg at the time of the credit event. This requires ...

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