If a CDS spread widens, does it mean the CDS price will decrease due to the CDS price formula being 100- upfront prem, and CDS spread is a function of Upfront prem%? A higher CDS spread will cause the upfront premium to rise, which will decrease the CDS price?
I am not too clear with CDS pricing, if someone could clarify. Thanks!
(coupon-spread)*duration = premium = 1 - price/100
=> price = 100* ( 1+ (spread - coupon) * duration )
If coupon is fixed (1% or 5%), increase of spread makes price increase.
I think it’s the other way around (CDS spread -coupon) * duration for the upfront premium part. Then Price = 100 - upfront premium, so an increase in spread will decrease the price
If I hadn’t answered your post and if you hadn’t given the right formula, … :).
so, thank you very much.
It is important to understand that when the credit spread change , the gain or loss is the difference between the new value of premium and original upfront premium. Not simply the new premium