hi,Can anyone tell me how trader manages their CDS portfolio? I understand that for IRS, trader uses PV01 to monitor their postion and hedge their bucket risks accordingly.Thanks for any help in advance.

there is a big difference between the credit and IR world. in credit you're more concerned about idiosyncratic risk - this is what's going to drive your p/l. plus since 95% of the market is in 5y cds, you don't really worry about exposure along the curve. of course, cds traders trade corporate bonds as well, so they have to think along the curve there.

QuoteOriginally posted by: ASbityakovthere is a big difference between the credit and IR world. in credit you're more concerned about idiosyncratic risk - this is what's going to drive your p/l. plus since 95% of the market is in 5y cds, you don't really worry about exposure along the curve. of course, cds traders trade corporate bonds as well, so they have to think along the curve there.Can you give more insights? Why does a credit derivatives trader care about idiosyncratic risk?

what i mean is a default is going to have a big impact on the p/l whether the trader is long or short the name. in IR, there's no default risk - libor/swap rates are the risk-free benchmark rates everybody uses (i'm not considering counterparty risk here, which is negligible anyway). so in other words, rates portfolio p/l is less likely to gap than a credit portfolio even if you diversify. the underlying credit distribution is skewed as everybody knows (i.e. little upside, big downside). for example to have the same diversification as a 20 stock portfolio, you need to hold over a thousand bonds.

QuoteOriginally posted by: ASbityakovin IR, there's no default risk - libor/swap rates are the risk-free benchmark rates everybody uses (i'm not considering counterparty risk here, which is negligible anyway). so in other words, rates portfolio p/l is less likely to gap than a credit portfolio even if you diversify. the underlying credit distribution is skewed as everybody knows (i.e. little upside, big downside). for example to have the same diversification as a 20 stock portfolio, you need to hold over a thousand bonds.The swap curve is not free of credit risk, it generally trades above govies. It is generally considered of AA credit quality. Without collateral and netting agreements counterparty credit risk cannot be ignored in pricing swaps. i'm not sure i agree that p&l "events" are less likely in a rates book. surely this depends on how the book is risk managed. Even super-liquid rates (€,$) can frequently move 20-25bps on unexpected data (maybe 4-5 times per year.)

hi, thanks for all the answers I received. However, I still have some question that I hope someone can answer them:a) How trader mark to market their CDS portfolio? Using in house model or take the price from the broker pages?b) How do you obtain the implied survival probability and recovery rate for pricing CDS which is not actively trading in the market? c) What is the most common model practitioner used to price CDS?thanks for any help in advance

For single name CDS's most market participants simply take the cds quotes from a broker and discount the difference between the market spread and the contracted spread (using credit risky discount factors).To price a non-vanilla CDS (eg. amortizing) you may need to back-out the (risk-neutral) implied default probabilities from the market CDS spreads.For a name which doesn't actively trade in the market you may need to estimate a corporate spread from the term structure of the corporate bonds issued by that name. However, you may be introducing other distortions (eg. liquidity issues of the different bonds across the term structure).