A question about nth to default CDS

jenniferlwj · April 13th, 2006, 2:35 pm

I have a question about nth to default CDS that I'm not clear. Say for 2nd to default CDS, after 1 default, how do we pay the premium fee? Do we adjust the total notional to exclude that name? Or we still pay based on the notional from the beginning?I looked for various reference, they don't say it clearly which seems pretty obvious.Thanks for your information...

schizoidman · April 15th, 2006, 11:33 pm

For a Nth to Default basket, the premium is paid on the (original notional - defaulted notional). This is also the practice for most CDOs and credit index trades.However, for credit index tranche trades the most common practice is to pay the premium on (original notional - defaulted notional + recovered notional).The first type of amortization (FTD, CDO, Index) is known as Junior, and the second type (Tranches) is known as None.

amitbatra · November 22nd, 2006, 10:44 am

Hi Schizoidman,Can you mention a good reference.Cheersamitbatra

slym · November 22nd, 2006, 12:58 pm

I don't agree with schizoidman ...For Nth to default baskets, you pay a fee on a 100 notional for protection against the nth default in a m-issuers basket.Thus, you 'll keep on paying the fee on the 100 even the basket experienced N-1 defaults !I'm quite sure about that ...Rgds,slym

bulbusmaximus · December 6th, 2006, 1:08 pm

I agree with slym..CDO Tranches are loss based trades while Nth to default are Notional based trades. That is the way they are traded in the market so once the Notional is fixed at the initiation of the trade the premium is paid on it irrespective of the defaults. Ofcourse only till the nth defaults...