Hi Guys, first post here - figured this forum would probably have the answer! Does anyone know if the CDS price on say EUR 1 m worth of Senior bank debt of a European bank is directly comparable to the CDS price on say USD 1 m of senior bank debt of a US bank? The point being is there any need to use exchange rates to convert the prices? Thanks
yes
Is that yes - they are directly comparable? Or yes - they must be converted?
why would they need to be converted? if you’re hedging a european bank the exposure is to the euro - as us banks are to the dollar. they are directly comparable as the cds reflects the price of the risk profile, including their main currency.
***I deleted my original post while I think about it some more, also dropped a copy of this over to our CDS desk, but I’m pretty sure Mar350’s right. Because the CDS ONLY reflects credit risk and not currency risk, it should be equivalent.
Desk says Mar’s right, they are directly comparable, but you always need to account for liquidity differences. If you have an issuer that issues in both EUR and USD for example, you should look at the CDS in the currency they typically issue more in as that will likely be more liquid as an indicator
Would you not have to account for exchange rates at some point tho since I assume CDS prices increase with the face value of the contract? For example, 1MM CDS of bank debt denominated in USD is more than 1MM of CDS bank debt denominated in Yen. Since the exposure to the nominal value of the underlying obligation is different, I would say the contracts are NOT comparable. Am I way off?
tigs - you know the “price” is the spread, right?
jorgeam86 Wrote: ------------------------------------------------------- > Would you not have to account for exchange rates > at some point tho since I assume CDS prices > increase with the face value of the contract? > > For example, 1MM CDS of bank debt denominated in > USD is more than 1MM of CDS bank debt denominated > in Yen. Since the exposure to the nominal value of > the underlying obligation is different, I would > say the contracts are NOT comparable. Am I way > off? I don’t think this is correct. He’s talking about comparing premiums as in a ratio of nominal exposure. CDS prices (as a % of notional) do not increase with the value of the contract. To dealers, purchasing protection on 100MM is no different from purchasing protection on 10MM from a relative cost perspective.
Many thanks all, great answers. You’ve saved me from a painful spreasheet building exercise! It’s clear that direct comparison with no conversion is correct - as yes the premium is simply a ratio, regardless of currency, although as Black Swan has pointed out, you could have different values for EUR and USD for the same bank - due any number of reasons.