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Comparing CDS Spreads Across Currencies for Country-Risk Adjustments

Article Quant Q&A · Author: Damian
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Summary

The document raises a fixed-income valuation question: whether CDS spreads quoted in different currencies can be subtracted to adjust a bond’s credit margin for a change in issuer country. The example compares five-year U.S. and Polish CDS quotes, then adds their spread difference to a bond margin to estimate a hypothetical Polish issuance margin. Converting both quotes to PLN produces a different adjustment, prompting uncertainty about the correct basis.

The document provides no answer or supporting analysis, so it does not establish that direct subtraction or currency conversion is valid. The issue points to the need to align CDS contract conventions and currencies and to account for the relationship between CDS, bond funding, and the relevant swap or floating-rate curve. Its numerical illustration is a question rather than evidence that the proposed country-risk adjustment isolates country risk.

Key ideas

  • The author asks whether CDS spreads quoted in different currencies can be compared directly.
  • The example estimates a country-risk adjustment by adding the difference between two CDS quotes to a bond margin.
  • Converting both spreads to PLN yields a different adjustment in the example.
  • The document leaves the methodology unresolved and supplies no evidence validating either calculation.

Tags

Fixed incomeDerivatives pricingForex
Full text
# Currency of CDS and adjustment of interest rated for country risk


# Currency of CDS and adjustment of interest rated for country risk












I have question concered currency of the CDS spreads.

In the analysis I am conducting, I perform adjustment of interest rates for country risk (CDS could be a reference to reflect a country risk).

I have bond issued in USA for e.g. 5Y with interest rate WIBOR 6M + margin 500 bp (now it is expressed as WIBOR – previously it was fixed rate but I converted it via some swap pricer into WIBOR). CDS for USA 5Y is let’s say 21,07 bp EUR and for Poland 5Y 56,52 USD bp. Then I would like to perform adjustment of interest rate for country risk - so I would like to get margin level which should be if the bond would issued in Poland instead of USA. So I would like to make the following adjustment: 500 bp + (56,52-21,07) = 535,45 bp <-- this should be value of the analyzed bond’s margin as if it was issued in Poland instead of USA.

My questions are about the currencies of the CDS spreads used to conduct the above adjustment:

- Should the CDS Spreads be in the same currency if I make the calculation (56,52 USD vs. 21,07 EUR)? I.e. Is it possible to compare the CDS Spreads in different currency?

- If the currency should be the same, then which currency should be taken as a reference, as some CDS spreads are expressed in USD or EUR?

- Or maybe I should convert each CDS Spread to PLN as the base rate of adjusted bond is polish WIBOR + margin?

With this approach I have doubt that if the CDS Spread would be expressed in PLN then the CDS for USA and PL would amount to: (i) USA: 96,29 PLN, (ii) PL: 238,68 PLN. Then the adjustment for country risk would be as follows: 500 bp + (238,68 - 96,29) = 642,39 bp. This means that adjustment would be higher that using for example EUR or USD currency.

BR, Damian

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.