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The Handbook of Fixed Income Securities, Eighth Edition, 8th Edition by Steven V. Mann, Frank J. Fabozzi

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CHAPTERSIXTY-SEVENCREDIT DERIVATIVE VALUATION AND RISK

DOMINIC O’KANE, D.PHIL. (OXON)

Affiliated Professor of FinanceEDHEC Business School

The purpose of this chapter is to set out the valuation methodology for credit swaps (CDS) and CDS indices. As described in Chapter 66, a credit default swap (CDS) is the most commonly traded credit derivative contract. It is also the building block for the CDS indices. An understanding of the valuation and risk management of CDS is therefore essential if we are to understand the valuation and risk management of CDS indices and other credit derivatives.

CDS VALUATION

For valuation purposes the essential features of a CDS contract are as follows:

• A regular fixed coupon is paid on the premium leg from the ...

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