Does anyone happen to know how the below formula is derived, specifically the duration part? I understand that the present value of the difference between the yearly credit spread and fixed coupon (1% for IG and 5% for HY) needs to be paid out by one party, but I can’t see why the duration is being used as a weight.
Upfront Payment on CDS = (Credit Spread - Fixed Coupons ) * Duration
Also, the curriculum doesn’t mention this, but I assume we’re talking about Macaulay Duration?
Many thanks in advance!