Market Quotes and Models for CDS Index Tranches and Options

Summary

The document asks how credit derivatives are quoted and modeled across single-name CDS, CDS indexes, index tranches, CDOs, and options on index tranches. It notes that single-name CDS quotes may appear as upfront payment plus coupon, spread, or price, and refers to the ISDA standard model, which assumes a constant default intensity among its stated assumptions. The author then asks whether similar conventions apply to index products and what a maturity-and-tranche quote represents.

A central question is when default correlation enters pricing. The text contrasts CDS indexes, where the author is unsure whether correlation is used, with CDO tranches, where correlation matters, and asks what models govern bespoke deals and tranche options. It provides no answers, quote examples, or model comparisons. It is therefore a set of introductory questions about credit derivative market conventions and dependence assumptions, rather than a guide to valuation.

Key ideas

• Single-name CDS may be quoted through upfront payment and coupon, spread, or price.
• The document associates the ISDA standard model with a constant default intensity assumption.
• It asks how maturity and tranche terms are represented in CDS index quotations.
• It asks how default correlation affects index, CDO, and tranche option pricing.
• No market model or definitive answer is provided for the questions raised.

Tags

# Credit quotations with which ISDA models?


# Credit quotations with which ISDA models?












I understand that single name liquid CDSs are (roughly speaking) quoted through either upfront+coupon, spread or price, and that for the pricing, the ISDA standard model is used : among other hypotheses the default intensity $\lambda$ is supposed constant.

- How are quoted cds indexes ? Are only tranches of cds indexes quoted ?

- I saw a (maturity, tranche) quotation, what does it mean ? That's, which market model is used ? I heard the same standard model than the one for single names is used : what does that mean ?

- As far as I understand no correlation is involved for cds indexes, does the "cds index ISDA standard model" assume that all default time are independant with the same constant default intensity ?

- As far as I understand, for CDOs (standard or bespoke), the correlation comes into play : how are they quoted, and through which market model ?

- options on cds index tranches : od they exist ? how are they quoted ? which market model is used ?

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