hard · Principles of Finance time-value-of-money
A 5-year CDS on an issuer with a 'true' par spread of 250 basis points is traded with a standardized fixed coupon of 100 basis points.
How is the difference in spreads settled at the start of the contract?
- The protection seller pays an upfront fee to the protection buyer.
- The spread difference is ignored until a credit event occurs.
- The notional of the contract is increased to adjust for the spread difference.
- The protection buyer pays an upfront fee to the protection seller.
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