CDS Pricing in practice
The mechanism we're taught when studying cds is that the buyer of protection pays a periodic fee to the seller. But when looking at the screen on reuters/bloomberg, there are three components : the fixed rate, the spread and the price. I understand that the fixed rate is the exchange standard and that the spread is what the risk is actually valued, so the price will depend on the relation between both: if we pay 1% (fixed rate for IG bonds) but the spread is actually 50bps, then we're paying too much and it will be compensated with a lower price. However, when looking at the 5Y iTraxx or CDX for IG bonds, we have that FR = 100bps, Spread = ~50bps, but the price is 102.26. I don't understand in what case we would have to pay an upfront premium in addition to overpaying on the periodic payments ? Is it due to some sort of accrued interest/premium in between fee payments ?
Thank you
following
In those cases, coupon is fixed and then you pay an increased or decreased price based on the yield you would expect to receive. (Ie if protection cost 60 bps, you would pay higher than 100, if 50 bps you pay par, if 40 you would be lower)
But we’re paying 100bps fixed. If protection is worth anything less than 100, we should be receiving upfront not paying. Is there something I’m missing ?
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