Abstract
Credit default swaps and bonds of the same credit will usually trade similarly, as both reflect the market’s view of default risk. As discussed, a CDS is a measure of credit risk of an entity. Credit default swaps are not measured as a spread over a benchmark, rather, the spread is the annual coupon the buyer of protection (short risk) will pay and the seller of protection will receive. Quite simply, the higher the perceived credit risk, the higher the CDS spread. In order to compare credit default swaps with bonds, one needs to isolate the spread of the bond that compensates the holder for assuming the credit risk of the issuer.
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© 2011 Gianluca Oricchio
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Oricchio, G. (2011). CDS Valuation and Trading Strategies. In: Credit Treasury. Palgrave Macmillan Finance and Capital Markets Series. Palgrave Macmillan, London. https://doi.org/10.1057/9780230307308_4
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DOI: https://doi.org/10.1057/9780230307308_4
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-32703-4
Online ISBN: 978-0-230-30730-8
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