Why CDS and Bond Spread Sensitivities Can Be Similar but Differ

Summary

The document addresses why the spread sensitivity of a credit default swap (CDS) may be close to that of a par bond from the same issuer. It distinguishes standardized CDS contract terms from the market quote: a CDS may carry a standard running coupon plus an upfront payment, while its quoted spread expresses the running rate that would make the upfront amount zero. That quoted CDS spread is often in the same general range as the bond’s Z-spread, but the two need not match.

The answer therefore cautions against treating similar spread levels as proof that a CDS and a same-maturity par bond must have equal DV01. Common risk measures include the CDS mark-to-market change for a small move in CDS spread and the bond price change for a small move in Z-spread; these sensitivities can be comparable. Their difference depends partly on the spread basis and convexity, and CDS risk analysis also considers jump-to-default exposure. The discussion is qualitative: it provides no instrument-specific calculation and does not establish an exact relationship across issuers or market conditions.

Key ideas

• A CDS quote can be expressed as the spread that would remove its upfront payment.
• The quoted CDS spread and a bond's Z-spread may be close without being equal.
• CDS spread sensitivity and bond Z-spread sensitivity can be comparable, but their DV01s need not match exactly.
• The difference between sensitivities can grow with the spread basis because of convexity.
• CDS risk assessment also includes exposure to a jump to default.

Tags

# Why is the DV01 of a CDS roughly equal to the DV01 of a par bond issued by the same reference entity?


# Why is the DV01 of a CDS roughly equal to the DV01 of a par bond issued by the same reference entity?












The claim was made in this link: https://www.investment-and-finance.net/derivatives/c/cds-dv01

But I don't understand why that is.

## Answer by Dimitri Vulis (score 2)

https://quant.stackexchange.com/a/65598

I don't like this page.

CDS are usually traded with a standardized running spread (usually 100 bps) and an upfront fee that varies depending on the credit. However CDS are usually quoted as an annual spread that would make upfront zero (unless the name is very distressed and quoted on upfront).

By construction, this market standard quote CDS spread comes out to be in the same ballpark as the Z-spread of the bonds. It is normal to be some basis between them.

There's no reason why the basis should be zero for the kind of par bond that your page decribes, even if the CDS and the bond have the same maturity.

The risk measures usually used for CDS include jump to default, and the sensitiviy of the CDS MTM to a 1 bp change in the CDS spread. It is comparable to the sensitivity of a bond to a 1 bp change in the Z-spread. Because of convexity, the larger the basis, the larger the difference between these spread sensitivities.

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