Credit Events in CDS Tranches
Hi All,
Anyone know of a resource/site that gives a simple example on how the payouts of CDS tranches work?
The few I have found don't continue after the first credit event. I want to see how further credit event payouts are calculated - ideally, seeing the payments affecting the next tranche as well.
Thanks
Are you talking about CDS indices or CDOs?
I think he's referring to credit synthetics. It's been a while since I've worked on these things and I don't know if I understand your question.
True but unless he clarifies it's very general... a CDS itself doesn't have tranches in the first place, and structure will depend on the product.
Agreed with the above two posters, the instrument needs to be clarified. Whether it is a bespoke CDO or a CDX Tranche matters as that changes what constitutes a default, let alone valuation.
Apologies for lack of clarity. Dealing with CDX Tranches.
Determining the payout when there is a credit event seems to be determined by the following:
payment = ((Notional) * (1 / weighting) * (1 - recovery)) / (Tranche width)
The tranche width is then reduced according to:
tranche width = tranche width - ((1 / weighting) * (1 - recovery))
What I am not sure about is what happens with subsequent defaults...
Questions like: Are the notional and weighting variables going to be the same in the payment equation for the next credit event?
Difficult to find an example with the numbers that would likely answer such questions.
here it is... https://www.markit.com/news/Credit%20Indices%20Primer.pdf
Thanks BayStreetShark and all for your help with this.
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