Credit default swap definition

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A credit default swap (or CDS) is an insurance policy, written against a particular security, that insures the holder of the CDS against a credit event affecting that security. The definition of a credit event is specified in the terms and conditions of the CDS, but it typically involves the bond issuer being unable to make a coupon or principal repayment.

Security code

Credit default swaps have security type CDS.

Calculation of returns

Although the mathematics behind a credit default swap (CDS) is complex, this asset type is particularly simple to handle in FIA.

Since almost all the return from a CDS is assumed to come from credit, the return from such securities is assigned to the Residual bucket on the system's reports in the same way as an equity.

A CDS has a small amount of exposure to the term structure due to the cash flow stream from premiums. However, these are typically small compared to other cash flows in a typical portfolio, so are ignored in the current implementation.

Security file setup

A CDS is set up as follows:

Field number Field Type Description Sample
1 Security ID String Identification code BB150511
2 Name String Name of cash type 15-05-2011 Bank bill
3 Start date Date Date at which record becomes effective [Blank]


4 Security type String Type code for bank bill (BILL) BILL
5 Currency String 3-character currency code AUD
6 Yield curve String Yield curve applicable to this security AUD_CURVE
7 Maturity Date Maturity date for bank bill 15/05/2011
8 Credit rating String Credit rating of bank bill AAA

Returns file setup

A bank bill requires the following information in the returns file:

Field number Field Type Description Sample
1 Date Date Date at end of interval 30/11/2009
2 Portfolio String Name of portfolio STF1
3 Security ID String Identifier for security BB150511
4 Market weight Double Market weight of security within portfolio 0.1443
5 Base currency return Double Base currency return of security -0.00322
6 Local currency return Double Local currency return of security -0.00322

In addition, information on the bill's yield to maturity, modified duration and convexity can also be supplied, if available:

Field number Field Type Description Sample
7 Yield to maturity Double Yield to maturity at end of current interval 0.0454
8 Modified duration Double Modified duration at end of current interval 0.540
9 Convexity Double Convexity at end of current interval 1.22

Example 1

A bank bill is issued in AUD with a maturity date of 15th June 2011. The bill has a AAA credit rating, and is priced off the AUD_CURVE yield curve.

This security is represented by a single entry in the security definition file:

Security ID Name Start date Security type Currency Yield curve Maturity Credit rating
BB150511 15-05-11 Bank bill BILL AUD AUD_CURVE 15/06.2011 AAA

The Start date field is left blank, indicating that all supplied characteristics remain unchanged during the bill's lifetime.

The security has the corresponding entries in the returns file:

Date Portfolio Security ID Market weight Base currency return Local currency return YTM MD C
3/12/2010 STF1 BB150111 0.0422 0.0001232 0.0001232 0.0443 0.521 1.044
4/12/2010 STF1 BB150111 0.0422 0.0001232 0.0001232 0.0445 0.519 1.042
5/12/2010 STF1 BB150111 0.0426 0.000128 0.000128 0.0449 0.516 1.029

These records show the weight and returns of the bill over successive days within the STF1 portfolio. Values for yield to maturity, moddified duration and convexity have been supplied, although these are optional.

Example 2

A bill is issued in USD with maturity date 20th Dec 2011. At issue, the bill was assigned a AA credit rating but was downgraded to AA- on 15th June 2011. This security is represented by two entries in the security definition file:

Security ID Name Start date Security type Currency Yield curve Maturity Credit rating
MCORP2012 Megacorp 20-Dec-2011 BILL USD USD_CURVE 20/12/2011 AA
MCORP2012 Megacorp 20-Dec-2011 15/6/2011 BILL USD USD_CURVE 20/12/2011 AA-

Both rows are identical except for the entries in the Start date and Credit rating column.

See also


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