Pricing Legacy CDS with the ISDA Model and Market Spreads
Summary
The document explains how the ISDA CDS calculator handles a contract that was originally traded in the past but is now being valued with less time to maturity. The calculator is a pricing model, not a historical or current spread database, so the user must supply a spread from a market data source. Given that spread, it calculates the contract’s upfront value, described as mark to market, from the risky present value of a basis point and the difference between the fair spread and fixed coupon.
For a legacy contract, the example says to enter the remaining maturity and a spread appropriate to the valuation being performed. The upfront value is not obtained merely by asking the calculator to infer a fair spread from its credit curve. The note does not explain how to select or source a spread, and its final instruction to enter any spread is too loose for an actual valuation: the input must represent the intended market level. The cited pricing identity is presented without further derivation.
Key ideas
- The ISDA CDS calculator prices a contract from an entered spread but does not supply the spread data.
- A legacy CDS can be represented using its remaining maturity when valuing it today.
- The upfront mark to market is expressed as risky PV01 multiplied by fair spread minus fixed coupon.
- A meaningful valuation requires a market spread suited to the valuation date and contract.
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Full text
# ISDA CDS model Upfront Fee # ISDA CDS model Upfront Fee Can the ISDA CDS model be used for "legacy" CDS? I understand that it lets you convert from traded spread to upfront and back on the day CDS was traded but what about CDS that was traded 2 years ago and has 3 years to maturity? On the Markit Calculator webpage, for the legacy CDS, I can enter the Trade Date as today, cash settle will be T+3 but why does it need "Traded Spread"? Where do I get that from since trade happened 2 years ago and I don't know/care what the current trade level is? Why can it not calculate the "fair spread" for this 2 year old CDS based on the credit curve it already has and use that as traded spread? If it did that, then upfront as of today would just be $$(fair\_spread - coupon) \times PV01$$ wouldn't it? Or am I confused about what Upfront really means on a legacy CDS? Thanks in advance. ## Answer by Phil-ZXX (score 2) https://quant.stackexchange.com/a/46172 Markit's CDS Calculator can price "legacy" (i.e. historically traded) CDS back to January 2005. However, as you rightly observed, it does not provide historic or current CDS spreads, you have to enter them yourself. This pricer is not a database. It's just a model. Markit's calculator provides the upfront (= market value) of a CDS, given a spread. And yes, this upfront is $$Upfront = MtM = RPV01 \cdot (FairSpread - FixedCoupon)$$ See e.g. Section 4.5. in The Pricing and Risk Management of Credit Default Swaps, with a Focus on the ISDA Model for more details. Sources for CDS spreads are either Markit themselves, ICE, Bloomberg or Reuters. Markit and ICE publish some spreads here: - Single-Names: https://www.theice.com/cds/MarkitSingleNames.shtml Now, if you want to price a CDS, which was booked 2Y years ago with a 5Y expiry, and now has a 3Y expiry, you just book it as a 3Y and enter any spread you want.
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