Hello,
So I understand that the upfront premium on a CDS is basically the additional amount the long CDS position has to pay to the short CDS position in order to balance out the risk between the long and short positions on a CDS contract.
Thus, this implies that a negative upfront premium means that the CDS will be overvalued. What does not make sense to me is how would the CDS be overvalued we are paying “too much” for the credit risk associated with that CDS. Seems like we should decrease the value of the CDS to the long position.