medium · Debt Capital Markets credit-ratings-risk
In a 'Standardized' credit default swap (CDS), if the fair spread is 150 bps but the standardized coupon is 100 bps, how is the difference settled at inception?
- The protection seller pays an 'upfront' cash amount to the buyer.
- The maturity of the CDS is shortened to compensate for the lower coupon.
- The notional amount of the CDS is increased by 50%.
- The protection buyer pays an 'upfront' cash amount to the seller.
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