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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