CDS - Vanilla Fixed Coupons

mtwain · August 13th, 2011, 8:41 pm

A question I hadn't though about much until recently, after being asked by a colleague.If you were to price two trades on the same curve, with the same maturiy, the only difference between the two being that k=100 for one and k=500 (where k = fixed coupon), what other considerations would you have to take into account other than the different upfront fees?

jonchambers · October 29th, 2011, 4:16 pm

Depends what your concerns are. One of the two coupons will be likely to be way more liquid than the other. Additionally they have different CS01 sensitivity. Therefore the one with the liquid coupon will likely be cheaper to hedge or close out over its lifetime (unless the underlying credit moves from IG to HG or vice versa along the way).