You can find the spreadsheets for this video and some additional materials here: drive.google.com/drive/folders/1sP40IW0p0w5IETCgo464uhDFfdyR6rh7 Please consider supporting NEDL on Patreon: www.patreon.com/NEDLeducation
WTF! whenever I look for crucial information, this channel comes out and I learn better then anywhere else! I studied economics in Bachelor 4 years, and did Msc in Finance 2 years! Instead of spending 6 years, I could just wacth those videos and learn more...
congratulations for presenting a very complex subject in a very clear way. For future presentations, when you are thirsty, you can stop recording and resume after you have quenched your thirst.
Are you familiar with Brenner & Subrahmanyam, 1988, “A Simple Formula to Compute the Implied Standard Deviation”? Have your ever implemented this model or has it been supplanted by more sophisticated models?
Thank you very much for the vivid illustrations of this very complex topic. Your calculations are the best in TH-cam. Quick question: 1.how would you adjust this for the Standard coupons brought in by the CDS big bang protocol and the fact that an upfront premium is paid at the beginning of the contract? 2. How would a CDS work in this situation?
Hi John and many thanks for the feedback! Excellent questions! The Bing Bang protocol was mostly about standardising credit event methodology so that everyone has a clear understanding when the protection seller has to compensate. If an upfront premium is being paid at the beginning of the contract, you could account for that by adjusting the discount factors accordingly to the new premium payment schedule. For valuation, it would mean that the swap rates would be slightly lower as they are paid earlier in time (less discounting, lower probability of default by the time coupon payments are due). Hope it helped.
Thanks for the great video. A rookie trying to learn so excuse the lame questions but is there any way to explain some basics : 1. How does the swap spreads for these corp and sov CDS change every minute? Given market spread is quite derivational , does the default probability change every second and that is what moves the spread? 2. The Reference Obligation or the market used ISIN, what does that reflect? Some of these CDS have the ISIN that are matured or have maturity that is shorter or longer than the tenure of the standard 5 year CDS. 3. In case of Credit Events, for bigger institutions which have issued multiple seniority level and maturity of debt, how is the debt repayment & repayment of CDS calculated?
Hi Renal, and glad you liked the video! I use Bloomberg DRSK function, but it is proprietary. A reasonably decent free source would be www.worldgovernmentbonds.com/sovereign-cds/
@@NEDLeducation Thank you for your reply. I want the historical CDS data of a particular bank and not Soverign CDS. Sorry for not mentioning above. In bloomberg, I am getting the historical data of only one year and not 10 years. Please help me on the same.
thanks for the video, quite helpful, just a doubt about payable (given default probability), why do we not need to divide by 2 assume default occurs mid year? thank you
Hi David, and glad you liked the video! Weibull distribution is actually used to model the loss distribution, not the probability of default. I have got a video on probability of default modelling using binary choice regressions with logit and probit, check these out if you are interested: th-cam.com/video/Lmq7DHUAzoU/w-d-xo.html and th-cam.com/video/51nHKDWIc9s/w-d-xo.html
What would happen if defaults occurred in the first quarter instead of every mid year (6 months = 0.5 years) would we subtract 0.75 or 0.25 when calculating the discount factor
Hi Mohammed, and thanks for the excellent question! In this instance, you would need to subtract 0.75 instead of 0.5 when calculating the discount factor, and multiply by 0.25 instead of 0.5 when calculating the swap rate payable given default. Hope this helps!
Hi, Great Video Can you please post video on Valuation of Swaps and Swaptions Also 1. How to value Swaption if there is payment frequency mismatch between fixed and floating cash flows 2. How to get for payment date volatility from volatility surface
Hi, and glad you enjoyed the video! As for your suggestion, I might do a video on swaptions at some point in the future when I return to covering derivatives-related topics.
hi thanks for the video! I am curious about Credit default swaps, specifically the trade of bill ackman (2.6bn) in 2020. As far as I understand, Bill payed 1.6bn in CDS contracts, and the contracts after spread widening due to corona were worth 4.2bn. The difference would be a 2.6bn profit. However, since the value of the CDS contracts is comprised of the sum of all the periodic payments (In the case of ackman, 27million per month increased to around 70mil monthly payments for 5 years), wouldn’t that mean that ackman still hasn’t received the full 2.6bn in profit? In other words, is my assumption correct that he is still getting payed 70mil every month from the person/institution he sold the CDS to, until the 5years expire? Additionally, i dont quite get why the media used the 27million dollar payment figure when the true price Bill payed was 1.6bn....
Hi Nathan, and glad you liked the video! As for your question, I presume Bill bought credit default swaps and then resold them when the credit risk concerns and the value of CDS he held increased. It means he was not paying the swap rate for the remainder of the period and effectively arbitraged his position. Hope it helps!
Hi Rujuta, and thanks for the question! In a standard (vanilla) CDS, the payment that a protection seller provides given a credit event is dependent on the recovery rate, while in a binary CDS the payment is pre-specified and is independent of the severity of the credit event and the respective recovery rate. Hope it helps!
You can find the spreadsheets for this video and some additional materials here: drive.google.com/drive/folders/1sP40IW0p0w5IETCgo464uhDFfdyR6rh7
Please consider supporting NEDL on Patreon: www.patreon.com/NEDLeducation
Thank you so much! I found this video super easy to understand and getting straight to the fundamental compared to others!
Hi, thank you very much for your kind words! Glad the video helped :)
WTF! whenever I look for crucial information, this channel comes out and I learn better then anywhere else! I studied economics in Bachelor 4 years, and did Msc in Finance 2 years! Instead of spending 6 years, I could just wacth those videos and learn more...
but get a better mic ! :)
Hi Batu, and thanks so much for the kind words! This is an old video, have already upgraded my mic (and camera as well) :)
Hi, fantastic video! you are a great person! thank you so much for the knowledge!!!
Thank you sir, you really helped me to understand this stuff.
Explained so lucidly , thank you so much.
congratulations for presenting a very complex subject in a very clear way. For future presentations, when you are thirsty, you can stop recording and resume after you have quenched your thirst.
you should use the mid year default probability on the protection column in my opinion??
Are you familiar with Brenner & Subrahmanyam, 1988, “A Simple Formula to Compute the Implied Standard Deviation”? Have your ever implemented this model or has it been supplanted by more sophisticated models?
Hi, and thanks for the excellent suggestion! I was about to do a video on implied volatility and will definitely include this approach as well :)
Thank you very much for the vivid illustrations of this very complex topic. Your calculations are the best in TH-cam.
Quick question:
1.how would you adjust this for the Standard coupons brought in by the CDS big bang protocol and the fact that an upfront premium is paid at the beginning of the contract?
2. How would a CDS work in this situation?
Hi John and many thanks for the feedback!
Excellent questions! The Bing Bang protocol was mostly about standardising credit event methodology so that everyone has a clear understanding when the protection seller has to compensate. If an upfront premium is being paid at the beginning of the contract, you could account for that by adjusting the discount factors accordingly to the new premium payment schedule. For valuation, it would mean that the swap rates would be slightly lower as they are paid earlier in time (less discounting, lower probability of default by the time coupon payments are due). Hope it helped.
@@NEDLeducation NEDL thank you very much for your prompt response. 👍 Quite helpful.
Good work out of you 👍
Would I be stupid to ask for a Free Data Source and the Spreadsheet is missing from Drive ?
Thanks for the great video. A rookie trying to learn so excuse the lame questions but is there any way to explain some basics :
1. How does the swap spreads for these corp and sov CDS change every minute? Given market spread is quite derivational , does the default probability change every second and that is what moves the spread?
2. The Reference Obligation or the market used ISIN, what does that reflect? Some of these CDS have the ISIN that are matured or have maturity that is shorter or longer than the tenure of the standard 5 year CDS.
3. In case of Credit Events, for bigger institutions which have issued multiple seniority level and maturity of debt, how is the debt repayment & repayment of CDS calculated?
Hello .. great teaching. Can you please tell me how I can find the CDS historical data of a particular year for past 10 years?
Hi Renal, and glad you liked the video! I use Bloomberg DRSK function, but it is proprietary. A reasonably decent free source would be www.worldgovernmentbonds.com/sovereign-cds/
@@NEDLeducation Thank you for your reply. I want the historical CDS data of a particular bank and not Soverign CDS. Sorry for not mentioning above. In bloomberg, I am getting the historical data of only one year and not 10 years. Please help me on the same.
Hi very useful videos. Thanks,
Do you also have such type of videos for the valuation of interest rate swaps please.
Hi, and glad you are enjoying the channel! I might do videos on other derivatives at some point in the future, thanks for the suggestion.
Why did not you use half of default probability to calculate expected protection payment in the event of default as scenario at the premium leg?
thanks for the video, quite helpful, just a doubt about payable (given default probability), why do we not need to divide by 2 assume default occurs mid year? thank you
Hi very good video, I would ask you if it is relevant to model the probability of default through a Weibull law
Hi David, and glad you liked the video! Weibull distribution is actually used to model the loss distribution, not the probability of default. I have got a video on probability of default modelling using binary choice regressions with logit and probit, check these out if you are interested: th-cam.com/video/Lmq7DHUAzoU/w-d-xo.html and th-cam.com/video/51nHKDWIc9s/w-d-xo.html
can you show us how to get the default probability from the credit spread?
Hello, you video is pretty clear: PV payments = PV benefits. But why substract 1% (or 5%) ? This is what I don't get
Can you tell me why in pricing a valuation product do we use "Discount factor"
What would happen if defaults occurred in the first quarter instead of every mid year (6 months = 0.5 years) would we subtract 0.75 or 0.25 when calculating the discount factor
Hi Mohammed, and thanks for the excellent question! In this instance, you would need to subtract 0.75 instead of 0.5 when calculating the discount factor, and multiply by 0.25 instead of 0.5 when calculating the swap rate payable given default. Hope this helps!
Hi, Great Video
Can you please post video on Valuation of Swaps and Swaptions
Also
1. How to value Swaption if there is payment frequency mismatch between fixed and floating cash flows
2. How to get for payment date volatility from volatility surface
Hi, and glad you enjoyed the video! As for your suggestion, I might do a video on swaptions at some point in the future when I return to covering derivatives-related topics.
hi thanks for the video! I am curious about Credit default swaps, specifically the trade of bill ackman (2.6bn) in 2020.
As far as I understand, Bill payed 1.6bn in CDS contracts, and the contracts after spread widening due to corona were worth 4.2bn. The difference would be a 2.6bn profit. However, since the value of the CDS contracts is comprised of the sum of all the periodic payments (In the case of ackman, 27million per month increased to around 70mil monthly payments for 5 years), wouldn’t that mean that ackman still hasn’t received the full 2.6bn in profit? In other words, is my assumption correct that he is still getting payed 70mil every month from the person/institution he sold the CDS to, until the 5years expire? Additionally, i dont quite get why the media used the 27million dollar payment figure when the true price Bill payed was 1.6bn....
Hi Nathan, and glad you liked the video! As for your question, I presume Bill bought credit default swaps and then resold them when the credit risk concerns and the value of CDS he held increased. It means he was not paying the swap rate for the remainder of the period and effectively arbitraged his position. Hope it helps!
What is binary CDS? how is it different?
Hi Rujuta, and thanks for the question! In a standard (vanilla) CDS, the payment that a protection seller provides given a credit event is dependent on the recovery rate, while in a binary CDS the payment is pre-specified and is independent of the severity of the credit event and the respective recovery rate. Hope it helps!
@@NEDLeducation Thanks a lot for the quick reply! You were a great help during exams