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Ronnie36
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Joined: February 11th, 2015, 8:53 am

Par Spread v Quoted Spread (CDS)

June 24th, 2016, 9:52 am

HiI am new to the CDS Pricing world and don't understand what the difference is between Par Spreads and Quoted (Or Conventional) Spreads.Would someone mind explaining this to me, I would really appreciate this! For example, a Par Spread of 190 bps is equal to a Quoted Spread of 192 bps for a trade I'm looking at. I cant get my head around this?Thank you so muchRonnie
 
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bearish
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Joined: February 3rd, 2011, 2:19 pm

Par Spread v Quoted Spread (CDS)

June 24th, 2016, 8:50 pm

We touched on that about three threads ago. Pls take a look there.
 
23tl
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Joined: July 8th, 2016, 2:47 pm

Par Spread v Quoted Spread (CDS)

July 6th, 2016, 9:37 pm

The following are quotes from "LEARNING CURVE ®A ?Big Bang? in the Credit Derivatives Universe"There is a subtle but important difference between the quoted spreads and the par spreads. When calibrating a credit curve, one uses the entire collection of par CDS quotes for different maturities. Under the new convention, the quotes are flat spreads: each maturity essentially has its own credit curve unrelated to the curves at other maturities. Each of these credit curves is flat with the spread given by the corresponding quote. Since it is only a quoting convention, the flat assumption makes it easier to translate the spreads into prices. One has to be aware of the fact that par spread and flat (or quoted) spread for the same reference entity for the same maturity can be different.
 
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bearish
Posts: 4969
Joined: February 3rd, 2011, 2:19 pm

Par Spread v Quoted Spread (CDS)

July 6th, 2016, 11:08 pm

QuoteOriginally posted by: 23tlThe following are quotes from "LEARNING CURVE ®A ?Big Bang? in the Credit Derivatives Universe"There is a subtle but important difference between the quoted spreads and the par spreads. When calibrating a credit curve, one uses the entire collection of par CDS quotes for different maturities. Under the new convention, the quotes are flat spreads: each maturity essentially has its own credit curve unrelated to the curves at other maturities. Each of these credit curves is flat with the spread given by the corresponding quote. Since it is only a quoting convention, the flat assumption makes it easier to translate the spreads into prices. One has to be aware of the fact that par spread and flat (or quoted) spread for the same reference entity for the same maturity can be different.Gee, that's helpful.
 
23tl
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Joined: July 8th, 2016, 2:47 pm

Par Spread v Quoted Spread (CDS)

July 7th, 2016, 1:41 pm

Par spread is "the spread that would cause the present value of a CDS trade to be zero for both the buyer and seller at the outset of the trade". Historically, par spread was the popular way to quote CDS. After the Big Bang initiated by ISDA, CDS on investment grade Reference Entities will stipulate a fixed coupon of 100 basis points and be quoted with a flat curve spread (quoted spread). High-yield Reference Entities will trade on a fixed 500 basis points spread and be quoted in up-front points. Quoted spread/upfront is trader's opinion on hazard structure. Thus, it is plain to see that: the difference in payment schema causes the difference in par spread and quoted spread. The former pays coupon equals to zero entry fee at trade date and par spread at coupon dates, while the latter pays a upfront fee at cash settlement date and standardized coupons at IMM dates. Par spread stands for future cash amount, while quoted spread tells the current entry cost. A more elegant explaination can be found at http://www.markit.com/cds/announcements ... g_bang.pdf. Based on market par spread quotes for CDS of different maturities, we can calibrate a default probability curve and to derive pv of the default leg and the premium leg of the CDS. They are unique for given maturity and reference entity. While quoted spread is a flat curve itself.Yet, they should not be too far away, as conceptually, they both stand for the credit quality of reference entity.
Last edited by 23tl on July 6th, 2016, 10:00 pm, edited 1 time in total.
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