hello forum,I would appreciate it if someone could tell me what the 'exact' 1 yr hazard rate is for the following CDS trade.Daycount is act365, CDS spreads are 100bp for all maturities, recovery rate is 40%. Interest rates are 2% for all maturities.Obviously, hazard rates are roughly 100bp / 60% = 166.7bp. Please could someone tell me how good this approximation is, i.e. what is the exact result from your model / system for the 1 yr hazard rate?I am trying to gain an understanding of the acceptable variance in this result across different models / systems.Many thanks,Herb

QuoteOriginally posted by: Herbiehello forum,I would appreciate it if someone could tell me what the 'exact' 1 yr hazard rate is for the following CDS trade.Daycount is act365, CDS spreads are 100bp for all maturities, recovery rate is 40%. Interest rates are 2% for all maturities.Obviously, hazard rates are roughly 100bp / 60% = 166.7bp. Please could someone tell me how good this approximation is, i.e. what is the exact result from your model / system for the 1 yr hazard rate?I am trying to gain an understanding of the acceptable variance in this result across different models / systems.Many thanks,HerbThis approximation is pretty good to measure MTM. The assumptions are the following:1. hazard rate and interest rate are independent2. the term structure of interest rate is flatThe term to maturity plays a big weight on changes of MTM.Hope it help you,J.

Hi guys,Could someone explain me the justification of the approximation formula:hazardRate = (spread)/(1-recovRate)In other words, how is the above formula derived?Thanks a lot,Ted

after a little math you getPV=(spread-hazard rate*(1-recovery rate))*risky durationand PV=0 at inceptionvoila

Ri, from the derivation you have below is it correct to say that the hazard rate integral includes some form of riskless discounting? If not then surely there is some slight mispricing by this simplified formula.

Hi Ri,Thanks for the post. Could you please elaborate a bit on the term "risky duration"? I know what a "duratioin" is for bonds but am not sure what the "risky duration" concept in the CDS context.Thanks,Ted

normal duration is the sum of disc factors and day count count fractions, risky is the same but weighted by the survival probability at each cash flow point. If the bond is subject to credit risk then you need to take into account the probability that you wont receive the payment at each point in time.

I can understand that the risky Duration (RPV01) is defined as said by pickles, but wondering if there is any market convention or simple approximation that doesn't necessarily require any assumption on the hazard rate? When we assume that the notional is decreasing to a fraction of 1, say f, can we control for the default/survival probability and hence only calculate that using the risk-free rate, r?More precisely, when you guys see the following equations, how would you interpret them?PV01 = (f+(1-f)*tau/T)*(1-exp(-r*tau))/TRPV01 = (f+(1-f)*tau/T)*(1-exp(-r*tau))/T - (1-f)/T*(1-exp(-r*tau)*(1+t*tau))/r^2What is the direct relationship between PV01 and RPV01?Can this be used to generally converting prices to spread regardless of the types of instruments (e.g. CDS, CDO, bonds)?If anyone gets any sense of this issue, please let me know.Thanks,Jason