Posted by
japari on
Jun 04, 2008; 8:02am
URL: http://quantlib.414.s1.nabble.com/CDS-upfront-tp11924p11929.html
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
> >
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