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Interpreting Running and Upfront Credit Market Premiums

Article Quant Q&A · Author: Daniel Lobo
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Summary

The document asks how to interpret quoted running and upfront market premiums at different tenors when working with preliminary data for estimating probability of default. It gives examples of five-year and eight-year quotes, each with a nonzero running premium and zero upfront premium. The central question is whether the running premium corresponds to a credit spread and what the upfront amount represents.

These terms commonly describe credit default swap premium quotes: the running component is the periodic premium paid for protection, while an upfront component is a one-time payment that can reconcile the contract’s value with market pricing. A zero upfront quote in the examples indicates no quoted upfront payment in those entries, but the document does not specify the instrument, quote conventions, payment frequency, recovery assumption, or curve used. Those details matter for translating market premiums into default probabilities, so the examples alone do not establish a probability of default.

Key ideas

  • Running premium quotes generally represent recurring payments for credit protection.
  • An upfront premium is a one-time payment that may accompany a credit protection contract.
  • Premium quotes at different tenors describe market pricing across contract maturities.
  • Converting premiums into default probabilities requires contract conventions and modeling assumptions not supplied here.

Tags

Fixed incomeDerivatives pricingRisk management
Full text
# Interpretation of data for Market Premium


# Interpretation of data for Market Premium












I am given some preliminary data with a goal to estimate the `probability of default`. This data consists of Market premium for different tenors.

One such example read that, Market `Premium (Running and Up-front)` for tenor 5 years are 1.40% and 0%. Similarly the `Market Premium (Running and Up-front)` for tenor 8 years are 1.55% and 0%.

I am curious what this data means? Is the `Running Market Premium` basically Credit Spread value for that particular tenor? What then is the meaning of `Up-front Market premium`?

Any pointer is very appreciated.

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