An Approximate Valuation Formula for a Credit Default Swap

17 Pages Posted: 2 Aug 2006

See all articles by Thomas K. Philips

Thomas K. Philips

NYU Tandon School of Engineering - Department of Finance and Risk Engineering

Date Written: September 5, 2006

Abstract

In this note, I describe a simple, but accurate, approximation for the value of a single-name Credit Default Swap (CDS). While it is not difficult to value a single name CDS, it is possible to speed up the valuation process by two or more orders of magnitude with surprisingly little error.

The method described in this note requires knowledge of only the initial and current spread of the CDS, its tenor, and the Libor yield at that tenor. It does not require knowledge of the entire yield curve or the term structure of CDS spreads, though the accuracy can be further enhanced by knowledge of the slope of the Libor curve. In spite of its very limited requirements of data and computation, it produces robust answers that are accurate to 1% over a wide range of spreads and tenors, making it well suited for use in simulations, particularly for purposes of risk management.

Keywords: Credit Defualt Swap, Valuation, Fixed Income

JEL Classification: G12, G10, Z00

Suggested Citation

Philips, Thomas K., An Approximate Valuation Formula for a Credit Default Swap (September 5, 2006). Available at SSRN: https://ssrn.com/abstract=920565 or http://dx.doi.org/10.2139/ssrn.920565

Thomas K. Philips (Contact Author)

NYU Tandon School of Engineering - Department of Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States

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