Credit Default Swap Spreadsheet Instructions For 5 year

Credit Default Swap Spreadsheet Instructions For 5 year and 10 year CDS

CDS Pricing - Instructions CDS PRICING: CASH FLOW DIAGRAM SETTING UP A CASH FLOW DIAGRAM • The first five columns are: 1) Times to maturity 1) 2) 3) 4) 5) 2 this sheet has cash flows semi-annually LIBOR rates LIBOR Discount Factor s Corporate bond rates Credit Risky Spread (over LIBOR)

CDS Pricing - Instructions SETTING UP A CASH FLOW DIAGRAM - 2 • The next two columns are: 1) Cumulative Implied Probability of Default 1) 2) As implied by credit spread Annual Probability of Default 1) Cum IPD 2 – Cum. IPD 1 3

CDS Pricing - Instructions SETTING UP A CASH FLOW DIAGRAM - 3 • The next 3 columns are: 1) Cum Prob of Default w/ Recovery 2) Cum Prob of Survival w/ Recovery 3) Sum of Default w/ recov + Surv = 1. 0 4

CDS Pricing - Instructions SETTING UP A CASH FLOW DIAGRAM - 4 DISCOUNT FACTORS • Discount factors used to discount multiple cash flows due on same date • Discount factors are the present value of one unit ($1. 00) • For our swap, we need annually compounded discount factors for our swap Where: r= Interest rate per annum t= time to maturity C = compounding periods 5

CDS Pricing - Instructions SETTING UP A CASH FLOW DIAGRAM - 5 • 1) 2) 3) The next three columns are RECEIVE LEG (w/ survival) Present Value of Receive Leg, with survival – ANNUAL Present Value of Receive Leg, with survival - CUMULATIVE 6

CDS Pricing - Instructions SETTING UP A CASH FLOW DIAGRAM - 6 • The next three columns are RECEIVE LEG (w/ default no recov) 1) 2) 3) Present Value of Receive Leg, with default, no recovery Present Value of Receive Leg, w def. ault no recov – ANNUAL Present Value of Receive Leg, w default no recov - CUM 7

CDS Pricing - Instructions SETTING UP A CASH FLOW DIAGRAM - 7 • 1) 2) 3) The next three columns are PAY LEG – contingent upon DEFAULT (with recovery) Present Value of Pay Leg, if default w recov Present Value of Pay. Leg, if default w recov– ANNUAL Present Value o. Pay Leg, if default w recov- CUMULATIVE 8

CDS Pricing - Instructions SETTING UP A CASH FLOW DIAGRAM - 8 • On top of the last three columns are: 1) 2) Recovery rate (default = 30% - 40%) Notional amount 9

CDS Pricing - Instructions SETTING UP A CASH FLOW DIAGRAM - 9 • 1) 2) 3) The last three columns calculate the CDS premium for each period CDS Premium =. in decimal CDS Premium * 10, 000 = BPs $CDS Premium = decimal * notional 10

CDS Pricing - Instructions • This spreadsheet is for educational purposes only • This is not an offer to buy or sell securities or derivatives • This spreadsheet has no protected cells • Cells with a red triangle in the top right hand corner include comments • While we prefer you not share this spreadsheet, if you do please attribute to MH Derivatives Solutions, LLC. • Contact MHDS with any questions at mccabe@mhderivativesolutions. com