How is the default probability based on the cost of the CDS contracts calculated?
For something like 10m notional. Let's say the cost of the CDS is 3.4m up front and 100K annually. How is the probability of default calculated?
You need to know the marked recovery rate of the name to find the implied PD. Here is a helpful link http://www.wilmott.com/messageview.cfm?catid=8&threadid=38922
Still a little confused after looking at the page. Let's say that the time is 5 years. What would be the equation set up?
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