Anybody know why the original Xover 5-year price is 0.9575? Within the chapter, the calculations were done using (1 + [(5 - 4) x 4.25) = 104.25. So (1 + (Coupon - Spread) x Effective Spread). I calculated CDS price always using this.
Here they used some equation and instead got 95.75. This is very confusing.
Did you check the errata? That chapter is full of mistakes in the examples.
I did check. There is an erratum for this question but about another mistake related to this question. Have you seen this question? I think must be wrong.
The effective duration is 4.25 years and the difference between the standard spread and the market spread is 100 bps. That’s what they used.
For this question, they used the CDS price as = 1 - [(5% - 4%) x 4.25). This is as you said.
But for example 29 and all other examples. The CDS price there is = 1 + [(1% - 1.2%) x 4.67]. I showed the first calculation here for CDX IG in solution 1 of example 29. This is how it is done in book throughout. Why is example 32 done differently?
This equation given in text errata and textbook:
CDS Price ≈ 1 + ((Fixed Coupon – CDS Spread) × EffSpreadDurCDS)
Good point. (Note to self: do not try to formulate replies that require critical thinking skills late on a Sunday night.)
They did get that one backward: lower spread, higher price.
I’ll submit an erratum to CFA Institute. I’ll let y’all know what they say.
Thanks for the insight. I will quit working altogether on Sundays.
Savage. Don’t do this. We need you to work on the Sundays
CFAI really bombed the 2022 Fixed Income readings - full of errors. I am extremely confused about this question too and it is frustrating.
I reasoned with myself that a cross-over CDS index is priced differently (as opposed to a normal CDX). Now that I read this post, it seems that there is an error.
By selling protection on the iTrexx-Xover index, is it a short or long position?
For a normal CDX as in Example 29, to buy protection is a short position on the CDS, whereas to sell protection, it is a long CDS position (correct me if I am wrong).
I think it use this formula : price change = (-duration * change in spread) to calculate the spread change leads to price chage. So it will be like 95.75 = 100* (1 + (-4.25) * 1.00%). I am confusing with this problem either. Fortunatelly, I hava an old version of CFA level 3 fixed income. I find similar question in this book.
