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CDS upfront

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Luca Billi

CDS upfront

Since sometimes CDS quotes are based on upfront (price) rather then premium,
it would be nice to have the possibility to use directly that upfront
when bootstrapping credit curves and when pricing CDS contracts.

I was wondering if anyone has thought about adding this feature or is
willing to share any ideas.

Thanks,
Luca

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Simon Ibbotson

Re: CDS upfront

Just a quick note on this (if anyone is thinking of implementing something) - it is also quite common for a contract to be both... i.e. have an upfront payment plus a running spread. So, incorporating a simple payment at the front of a CDS could be the simplest way of allowing upfront prices.

Simon

On 6/3/08, Luca Billi <[hidden email]> wrote:

Since sometimes CDS quotes are based on upfront (price) rather then premium,
it would be nice to have the possibility to use directly that upfront
when bootstrapping credit curves and when pricing CDS contracts.

I was wondering if anyone has thought about adding this feature or is
willing to share any ideas.

Thanks,
Luca

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japari

Re: CDS upfront

This is what happens with junior tranches. It makes sense when they are very
risky. Cant we add the upfront as a member to the cds? and then price/calibrate:

CL = upfront * DF (settlement) + \sum [c_i df_i psurv_i + accrued_i] = DL

Of course if there r no coupons, and this is your point I guess, we are left
with arbitrarily timed integration points in the default leg. We only have the
CDS tenors and will not interpolate for coupon dates (no coupons). ( Curiously
it means the CL is independent of the interpolator we choose) But then the
tenors can jump 5Y and that will make the DL integration innacurate.

A quick one is to have a zero spread schedule with coupons every 3M or 1M for
the DL computation (and incompatible with paysAtDefaultTime since these are
fictitious points), but thats just a dirty trick. Since we construct the
schedule outside the CDS I can not see a lib user setting schedules for a zero
spread....... Besides, it will burden the CL calculation with zero products...

what if coupon schedule = void THEN create 3M/1M empty schedule? Not elegant,
hum?

This question rises also the one of how accurate is to calculate the DL with the
coupons schedule, it might contain periods which are too long for accuracy.

pp

Quoting Simon Ibbotson <[hidden email]>:

> Just a quick note on this (if anyone is thinking of implementing something)
> - it is also quite common for a contract to be both... i.e. have an upfront
> payment plus a running spread. So, incorporating a simple payment at the
> front of a CDS could be the simplest way of allowing upfront prices.
>
> Simon
>
>
> On 6/3/08, Luca Billi <[hidden email]> wrote:
> >
> > Since sometimes CDS quotes are based on upfront (price) rather then
> > premium,
> > it would be nice to have the possibility to use directly that upfront
> > when bootstrapping credit curves and when pricing CDS contracts.
> >
> > I was wondering if anyone has thought about adding this feature or is
> > willing to share any ideas.
> >
> > Thanks,
> > Luca
> >
> > -------------------------------------------------------------------------
> > This SF.net email is sponsored by: Microsoft
> > Defy all challenges. Microsoft(R) Visual Studio 2008.
> > http://clk.atdmt.com/MRT/go/vse0120000070mrt/direct/01/
> > _______________________________________________
> > QuantLib-dev mailing list
> > [hidden email]
> > https://lists.sourceforge.net/lists/listinfo/quantlib-dev
> >
>

Simon Ibbotson

Re: CDS upfront

I think this has already been done in

ql\pricingengines\credit\integralcdsengine where you can choose an integration periodicity.

Simon

PS You have to look at the files - I don't think they've been added to the VC++ project file.

On 6/4/08, [hidden email] <[hidden email]> wrote:

This is what happens with junior tranches. It makes sense when they are very
risky. Cant we add the upfront as a member to the cds? and then price/calibrate:

CL = upfront * DF (settlement) + \sum [c_i df_i psurv_i + accrued_i] = DL

Of course if there r no coupons, and this is your point I guess, we are left
with arbitrarily timed integration points in the default leg. We only have the
CDS tenors and will not interpolate for coupon dates (no coupons). ( Curiously
it means the CL is independent of the interpolator we choose) But then the
tenors can jump 5Y and that will make the DL integration innacurate.

A quick one is to have a zero spread schedule with coupons every 3M or 1M for
the DL computation (and incompatible with paysAtDefaultTime since these are
fictitious points), but thats just a dirty trick. Since we construct the
schedule outside the CDS I can not see a lib user setting schedules for a zero
spread....... Besides, it will burden the CL calculation with zero products...

what if coupon schedule = void THEN create 3M/1M empty schedule? Not elegant,
hum?

This question rises also the one of how accurate is to calculate the DL with the
coupons schedule, it might contain periods which are too long for accuracy.

pp

Quoting Simon Ibbotson <[hidden email]>:

> Just a quick note on this (if anyone is thinking of implementing something)
> - it is also quite common for a contract to be both... i.e. have an upfront
> payment plus a running spread. So, incorporating a simple payment at the
> front of a CDS could be the simplest way of allowing upfront prices.
>
> Simon
>
>
> On 6/3/08, Luca Billi <[hidden email]> wrote:
> >
> > Since sometimes CDS quotes are based on upfront (price) rather then
> > premium,
> > it would be nice to have the possibility to use directly that upfront
> > when bootstrapping credit curves and when pricing CDS contracts.
> >
> > I was wondering if anyone has thought about adding this feature or is
> > willing to share any ideas.
> >
> > Thanks,
> > Luca
> >
> > -------------------------------------------------------------------------
> > This SF.net email is sponsored by: Microsoft
> > Defy all challenges. Microsoft(R) Visual Studio 2008.
> > http://clk.atdmt.com/MRT/go/vse0120000070mrt/direct/01/
> > _______________________________________________
> > QuantLib-dev mailing list
> > [hidden email]
> > https://lists.sourceforge.net/lists/listinfo/quantlib-dev
> >
>

japari

Re: CDS upfront

True for the accuracy question but the pricer integrates over the coupon periods
in the schedule. If we have no schedule we want to do the same from start to
end. The upfront should be easier to incorporate here than to the midpoint; we
can do a test on the schedule, if none choose the integration dates and set a
period.
pp

Quoting Simon Ibbotson <[hidden email]>:

> I think this has already been done in
> ql\pricingengines\credit\integralcdsengine where you can choose an
> integration periodicity.
>
> Simon
>
> PS You have to look at the files - I don't think they've been added to the
> VC++ project file.
>
>
>
> On 6/4/08, [hidden email] <[hidden email]> wrote:
> >
> > This is what happens with junior tranches. It makes sense when they are
> > very
> > risky. Cant we add the upfront as a member to the cds? and then
> > price/calibrate:
> >
> > CL = upfront * DF (settlement) + \sum [c_i df_i psurv_i + accrued_i] = DL
> >
> > Of course if there r no coupons, and this is your point I guess, we are
> > left
> > with arbitrarily timed integration points in the default leg. We only have
> > the
> > CDS tenors and will not interpolate for coupon dates (no coupons). (
> > Curiously
> > it means the CL is independent of the interpolator we choose) But then the
> > tenors can jump 5Y and that will make the DL integration innacurate.
> >
> > A quick one is to have a zero spread schedule with coupons every 3M or 1M
> > for
> > the DL computation (and incompatible with paysAtDefaultTime since these are
> > fictitious points), but thats just a dirty trick. Since we construct the
> > schedule outside the CDS I can not see a lib user setting schedules for a
> > zero
> > spread....... Besides, it will burden the CL calculation with zero
> > products...
> >
> > what if coupon schedule = void THEN create 3M/1M empty schedule? Not
> > elegant,
> > hum?
> >
> > This question rises also the one of how accurate is to calculate the DL
> > with the
> > coupons schedule, it might contain periods which are too long for accuracy.
> >
> > pp
> >
> > Quoting Simon Ibbotson <[hidden email]>:
> >
> > > Just a quick note on this (if anyone is thinking of implementing
> > something)
> > > - it is also quite common for a contract to be both... i.e. have an
> > upfront
> > > payment plus a running spread. So, incorporating a simple payment at the
> > > front of a CDS could be the simplest way of allowing upfront prices.
> > >
> > > Simon
> > >
> > >
> > > On 6/3/08, Luca Billi <[hidden email]> wrote:
> > > >
> > > > Since sometimes CDS quotes are based on upfront (price) rather then
> > > > premium,
> > > > it would be nice to have the possibility to use directly that upfront
> > > > when bootstrapping credit curves and when pricing CDS contracts.
> > > >
> > > > I was wondering if anyone has thought about adding this feature or is
> > > > willing to share any ideas.
> > > >
> > > > Thanks,
> > > > Luca
> > > >
> > > >
> > -------------------------------------------------------------------------
> > > > This SF.net email is sponsored by: Microsoft
> > > > Defy all challenges. Microsoft(R) Visual Studio 2008.
> > > > http://clk.atdmt.com/MRT/go/vse0120000070mrt/direct/01/
> > > > _______________________________________________
> > > > QuantLib-dev mailing list
> > > > [hidden email]
> > > > https://lists.sourceforge.net/lists/listinfo/quantlib-dev
> > > >
> > >
> >
> >
> >
>

a akpitidis

Re: CDS upfront

In reply to this post by Simon Ibbotson

Hi ,

The curve is always using the real spread (upfront+running), so, any bootstrapping should not deal with the upfront trades/quotes.

Remember a financial institution may have a mixture of trades (upfront and not upfront ) for a single name(i.e. the non upfront trades booked year ago and the upfront trades the last few months), they have to MTM all those trades using the same curve.

--- On Wed, 4/6/08, Simon Ibbotson <[hidden email]> wrote:

From: Simon Ibbotson <[hidden email]>
Subject: Re: [Quantlib-dev] CDS upfront
To: "Luca Billi" <[hidden email]>
Cc: [hidden email]
Date: Wednesday, 4 June, 2008, 8:15 AM

Just a quick note on this (if anyone is thinking of implementing something) - it is also quite common for a contract to be both... i.e. have an upfront payment plus a running spread. So, incorporating a simple payment at the front of a CDS could be the simplest way of allowing upfront prices.

Simon

On 6/3/08, Luca Billi <[hidden email]> wrote:
Since sometimes CDS quotes are based on upfront (price) rather then premium,
it would be nice to have the possibility to use directly that upfront
when bootstrapping credit curves and when pricing CDS contracts.

I was wondering if anyone has thought about adding this feature or is
willing to share any ideas.

Thanks,
Luca

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Simon Ibbotson

Re: CDS upfront

I don't understand why - if the market is quoting the upfront (as a % notional) - we can't use this in a curve as a quote? Obviously, some work would have to be done first to create an appropriate credit ratehelper class.

Simon

On 6/4/08, a akpitidis <[hidden email]> wrote:

Hi ,

The curve is always using the real spread (upfront+running), so, any bootstrapping should not deal with the upfront trades/quotes.

Remember a financial institution may have a mixture of trades (upfront and not upfront ) for a single name(i.e. the non upfront trades booked year ago and the upfront trades the last few months), they have to MTM all those trades using the same curve.

T.

--- On Wed, 4/6/08, Simon Ibbotson <[hidden email]> wrote:
From: Simon Ibbotson <[hidden email]>
Subject: Re: [Quantlib-dev] CDS upfront
To: "Luca Billi" <[hidden email]>
Cc: [hidden email]
Date: Wednesday, 4 June, 2008, 8:15 AM

Just a quick note on this (if anyone is thinking of implementing something) - it is also quite common for a contract to be both... i.e. have an upfront payment plus a running spread. So, incorporating a simple payment at the front of a CDS could be the simplest way of allowing upfront prices.

Simon

On 6/3/08, Luca Billi <[hidden email]> wrote:
Since sometimes CDS quotes are based on upfront (price) rather then premium,
it would be nice to have the possibility to use directly that upfront
when bootstrapping credit curves and when pricing CDS contracts.

I was wondering if anyone has thought about adding this feature or is
willing to share any ideas.

Thanks,
Luca

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Luigi Ballabio

Re: CDS upfront

In reply to this post by Luca Billi

On Tue, 2008-06-03 at 14:15 -0400, Luca Billi wrote:
> Since sometimes CDS quotes are based on upfront (price) rather then premium,
> it would be nice to have the possibility to use directly that upfront
> when bootstrapping credit curves and when pricing CDS contracts.
>
> I was wondering if anyone has thought about adding this feature or is
> willing to share any ideas.

As far as I know, nobody has worked on it yet---you're welcome to give
it a try. The ideas that people shared in this thread seem a good
starting point...

Luigi

--

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