the market is crazy. if you buy a 5-year CDS to protect yourself against Goldman default, the price is 8% upfront, 5% every year. What’s the formula to calculate the CDS spread? What’s the formula to find out the CDS price? Thanks.
If CDS on IBM is trading at 500 bps, it means to insure $10mm of IBM bonds you would need to pay $500k. The spread and the price are the same thing (assuming you are going off the standard $10mm face value of the insured bonds). No formula, it is simply a function of supply vs demand.
higher demand increases the price of your CDS. Not much to do vth any formulae.
aks2010 Wrote: ------------------------------------------------------- > higher demand increases the price of your CDS. but the trouble with this explanation is that yoy have explained it as a normal security, more buyers than sellers, more demand, less suplly pushes up prices, but here, you are buying protection and that is going short risk. always best to think in risk terms