As the creation of hypothetical CDS is a very complex process, the standard model (Hull & White, 2000) used as the basis with applying slightly different assumptions …show more content…
The probability of default taken from historical S&P Global rating data (Appendix F) matching BBB rating (matching target portfolio rating of BBB Fitch with S&P rating scale; see Appendix F): period 1- 0.18%, 2- 0.51% and etc. The probability of survival calculated: 1- the probability of default (Banks et al., 2007, p. 171) to every period; period 1: 1 – 0.18%, period 2: 1-0.51%. Fixed payment set semiannual (in aligning with coupon used) diving spread by 2. The expected value of the premium is calculated multiplying survival probability by fixed payment. Following, Present value of premium calculated: Discount factor * Expected value of premium * Open principal (period 1: 0.995* 122. 74*10.7M). Sum of PV of premium =1.184.875€. In addition, PV of accrued interest discounted by the same approach as PV of premium: Accrued interest amount * Discount factor* Open Principal (period 1: 0,995* 0, 11*10.7M). The accrued interest amount is assumed to be half of the fixed payment amount, holding that credit event will occur in the middle of the period (see the formula in page 28): period 1: 122.74/2*0.18. The total amount of Premium leg is defined as a sum of PV of premium and PV of accrued