SCR Calculator User Manual

Version 1.13.2.0 Last modified 2024-3-21

Credit Default Swap

CDS is sometimes used in insurance bond portfolios for risk management purposes. You need to specify the type, premium and notional of the CDS contract, and the rating and credit spread of the underlying. There are two types of CDS contracts: "Buy Protection / Pay Premium" and "Sell Protection / Receive Premium".

The CDS contracts are modelled using two sets of cashflows: a real set of premiums and a hypothetical set of "probabilistic default payouts".

  • For the "Buy Protection / Pay Premium" type, premiums will be shown as negative cashflows and the probabilistic default payouts will be shown as positive cashflows.
  • For the "Sell Protection / Receive Premium" type, premiums will be shown as positive cashflows and the probabilistic default payouts will be shown as negative cashflows.
  • Both cases are then goal sought w.r.t. an implied annual default rate, so that the total present value of these two cashflows equals the market value of the contract.

For a "Sell Protection / Receive Premium" CDS contract, the present value of the premiums must exceed the contract's market value, otherwise the calculator will complain and urge for revised inputs.