Financial Risk Manager Part 2

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Explanation:

The correct answer is A.

In CDS pricing, the price of the contract is derived by considering the difference between the quoted spread and the fixed coupon rate and then adjusting it by the duration of the contract. The formula $P = 100 - 100 \times D \times (\text{spread} - \text{coupon})$ takes into account the time value of the spread payments over the life of the CDS. The spread and the coupon are expressed in decimal form in this formula. In this case, with a quoted spread of 200 basis points (or 0.02 in decimal form), a fixed coupon rate of 150 basis points (or 0.015 in decimal form), and a duration of 4.0 years, the price of the CDS is calculated by plugging these values into the formula.

B, C, and D are incorrect as per the above explanation.

Things to Remember.

The formula $P = 100 - 100 \times D \times (\text{spread} - \text{coupon})$ reflects the present value of expected spread payments over the CDS lifespan.
The quoted spread, fixed coupon rate, and duration are key factors in determining the price of a CDS contract.
Understanding the relationship between these parameters is crucial for accurate pricing and risk assessment in CDS transactions.

Explanation:

The correct answer is A.

B, C, and D are incorrect as per the above explanation.

Things to Remember.

The formula $P = 100 - 100 \times D \times (\text{spread} - \text{coupon})$ reflects the present value of expected spread payments over the CDS lifespan.
The quoted spread, fixed coupon rate, and duration are key factors in determining the price of a CDS contract.
Understanding the relationship between these parameters is crucial for accurate pricing and risk assessment in CDS transactions.

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Q.6077 In the context of Credit Default Swaps (CDS), the relationship between the quoted spread, the fixed coupon rate, and the concept of "duration" is instrumental in determining the price of the contract. If a trader is analyzing a CDS contract where the quoted spread is 200 basis points, the fixed coupon rate is 150 basis points, and the calculated duration ('D') is 4.0 years, how should the trader compute the price ('P') of the CDS using these parameters?

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UAnonymous

Last updated: July 5, 2026 at 07:27

$P = 100 - 100 \times D \times (\text{spread} - \text{coupon})$ , where spread and coupon are in decimal form.

$P = 100 + 100 \times D \times (\text{spread} + \text{coupon})$ , where spread and coupon are in decimal form.

$P = 100 \times D \times (\text{spread} / \text{coupon})$ , where spread and coupon are in decimal form.

$P = 100 / (1 + D \times (\text{spread} - \text{coupon}))$ , where spread and coupon are in decimal form.