Hi,I'm valuing some Credit Default Swaps for which no CDS spreads are available. Instead, I'm using asset swap spreads. Can anyone tell me if Asset swap spreads are very different from CDS spreads ? Theoretically they should be equal since they both measure the credit worthiness of a same entity at a certain horizon. However, since CDS and asset swaps are different instruments and traded separately, I don't see why they would be identical.Much thanks - -

Your CDS and your Asset Swap have a few things that are going to make them trade a little differently, so adjust for them as best as you can. The first thing to remember is that the Asset Swap is calibrated off of libor(Swap Rate), which is basically an A+ implied rate, so the spread to libor is like the spread over an A+, so if your counterparty is of sufficiently different credit than this, then calibrate, in practice it can be ignored but it's something to keep in mind. Also the delivery on a CDS can be different from the physical nature of the Asset Swap, CD Swaps can be settled physically, or just cash settled, and they can have predetermined payoff amounts. If you have a credit default swap that is with an A+ counterparty and is physically settled you can be fairly confident that it should price near the Asset Swap. But this is neither hard, nor fast. Also bear in mind that the default swap market is a 7 year market at the outside, so pricing a 15 year default swap off of the asset swap on a 15 year bond may be a bit unrealistic, and quite dangerous.

Something else to keep in mind when deciding on the basis between CDS and asset swap:1. "Soft" credit events in CDS language, any sort of a Cheapest to Deliver option in CDS agreement or bonds trading below par (when CDS calls for payment of par at default) can all be reasons for a positive basis (CDS > Asset Swap).2. To be honest I'm the most junior guy at this desk. Negative basis is less common. But I guess bonds trading above par or counterparty risk may cause negative basis. I've also heard the structured guys talk about how synthetic CDOs can push the basis negative.

QuoteOriginally posted by: GorkiHi,I'm valuing some Credit Default Swaps for which no CDS spreads are available. Instead, I'm using asset swap spreads. Can anyone tell me if Asset swap spreads are very different from CDS spreads ? Theoretically they should be equal since they both measure the credit worthiness of a same entity at a certain horizon. However, since CDS and asset swaps are different instruments and traded separately, I don't see why they would be identical.Much thanks - -They certainly can be different...suppose the special repo rate on the bond were Libor +20....Suppose the asset swap spread is 50. What do you think the fair CDS premium would be in that case...roughly speaking?

Hi all... like to revisit an old theme here... I am trying to build a simple spread to calculate asset-swap spread or TED spread to value bond, and not just by calculating the yield differential of bond and the its theoretical yield on the swap curve. Can someone help ? Anything are welcome..regards

<blockquote>Quote<hr><i>Originally posted by: <b>khoon</b></i>Hi all... like to revisit an old theme here... I am trying to build a simple spread to calculate asset-swap spread or TED spread to value bond, and not just by calculating the yield differential of bond and the its theoretical yield on the swap curve. Can someone help ? Anything are welcome..regards<hr></blockquote>well, it's been a while...but, let me take a hack at the asset swap part. Asset Swap is a mechanism for converting a fixed rate non par asset into a floating rate par asset.You, an investor, buy a fixed bond and enter into a swap in which you pass the coupon to a counterparty and receive Libor plus spread. The spread is the asset swap spread and "represents the credit risk of the bond"...although, in reality, it should represent credit risk of the bond, liquidity, AND...the counterparty risk of the swap counterparty....anyway, to make things simple for exposition, suppose it is a coupon date. Then, we need....Bond+Swap=ParFrom your perspective, Swap is a pay fix swap, so...Bond+Float-Fix=Par.Fix is just the PV by Libor of coupons + a final notional.Float is FRN at Libor + spread....solving for spread...I get..spread=(Fixed-Bond)/SumDFiDeltTiTED is another story....I'll let someone else tell it....

Nonius: TED is another story....I'll let someone else tell it.... I'll tell it.So, first of all, the TED Spread is really the difference between a bond run by the government and a bond theoretically priced by the swap curve (AA-plus-ish)..So how do you want to use this to value a bond?

QuoteOriginally posted by: FDAXHunter<b>Nonius: </b><i>TED is another story....I'll let someone else tell it.... </i>I'll tell it.So, first of all, the TED Spread is really the difference between a bond run by the government and a bond theoretically priced by the swap curve (AA-plus-ish)..So how do you want to use this to value a bond?maybe use a tensor product method by invoking Clifford Algebras?

check LGD ( or recovery rate)