2
4. Standardizing rates (100/500), coupon payment dates, and accrual start dates maximizes fungibility and
ease of coupon processing.
Examples:
a) Every $10mm 100bp standard CDS contract will pay the exact same 2Q09 coupon, $26,111, on the
same date, Mon 22Jun09 – regardless of trade date, maturity, or reference entity. (One exception: any
trades maturing 20Jun09, which would pay their final $25,833 coupon on 22Jun09.)
b) A $10mm 100bp 20Mar14 (5y) contract hedged by a $10mm 100bp 20Mar15 (6y) contract will have
exactly offsetting cashflows until the first unhedged coupon, 2Q14 on 20Jun14.
5. A trade's first coupon payment date is determined by the trade date (T): it's the first coupon payment date
after T+1 (calendar, unadjusted). This is consistent with the first coupon dates of, eg, CDX.
Examples:
a) A standard CDS trade on T=Fri 20Feb09 pays its first coupon Fri 20Mar09 (paying annual coupon/360 ×
88, as per Table 1 above).
b) A trade on Wed 18Mar09 also pays its first coupon Fri 20Mar09 – exact same coupon as in (a).
c) But a trade on Thu 19Mar09 pays its first coupon three months later, Mon 22Jun09 (for 94 days).
d) Similarly, a trade on Sat 20Jun09 pays on Mon 22Jun09, but a trade on Sun 21Jun09 doesn't pay its
first coupon till Mon 21Sep09.
Converter assumptions
1. The converter is based on the ISDA CDS Standard Model code, with simpler assumptions. In particular, it
assumes a single flat hazard rate rather than a term structure of flat spreads.
2. The converter assumes that credit risk begins at the end of the trade date (T). That is, it divides a
contract's coupon days – from first accrual start date, to maturity date – into two types:
a) Riskless (aka accrual) days include the first accrual start date through T. They are assumed to have 0
chance of a credit event. They only contribute to fee through their coupon.
b) Risky days include T+1 through maturity. They are assumed to have some chance of a credit event,
quantified by the flat hazard rate. They contribute to fee through both their coupon and their chance of
payout on a credit event. Points upfront (and clean price) include only the value of risky days.
Example 1: The CDS from Table 1 above includes 454 coupon days. Suppose it's booked on 20Feb09.
Then, 22Dec08-20Feb09 (61 days) are assumed to be riskless, and 21Feb09-20Mar10 (393 days) are
assumed to be risky.
Example 2: Now suppose that, later on the day of T=20Feb09, a credit event occurs. The buyer is
protected, since the contract takes effect from the moment of the trade confirm (and protects against events
60 days back). The "first day free" assumption that T is riskless is just a converter simplification and does
not affect contract terms.
3. It follows from 2 above that:
a) The converter's fee (aka price) is dirty: it includes the value of the riskless accrual coupon days.
b) The converter's points upfront are clean: they exclude the riskless accrued.