CDS Valuation and Trading Strategies

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. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.