Introduction[edit]
A credit default swap (or CDS) is an insurance policy, written against a particular security, that insures the holder of the CDS against a credit event affecting that security. The definition of a credit event is specified in the terms and conditions of the CDS, but it typically involves the bond issuer being unable to make a coupon or principal repayment.
Security code[edit]
Credit default swaps have security type CDS.
Calculation of returns[edit]
Although the mathematics behind a credit default swap (CDS) is complex, this asset type is particularly simple to handle in FIA.
Since almost all the return from a CDS is assumed to come from credit, the return from such securities is assigned to the Residual bucket on the system's reports in the same way as an equity.
A CDS has a small amount of exposure to the term structure due to the cash flow stream from premiums. However, these are typically small compared to other cash flows in a typical portfolio, so are ignored in the current implementation.
Security file setup[edit]
A CDS is set up as follows:
| Field number | Field | Type | Description | Sample |
|---|---|---|---|---|
1 | Security ID | String | Identification code | BB150511 |
2 | Name | String | Name of cash type | 15-05-2011 Bank bill |
3 | Start date | Date | Date at which record becomes effective | [Blank]01/01/2010 |
4 | Security type | String | Type code for bank bill (BILL) | BILL |
5 | Currency | String | 3-character currency code | AUD |
6 | Yield curve | String | Yield curve applicable to this security | AUD_CURVE |
7 | Maturity | Date | Maturity date for bank bill | 15/05/2011 |
8 | Credit rating | String | Credit rating of bank bill | AAA |
Returns file setup[edit]
A bank bill requires the following information in the returns file:
| Field number | Field | Type | Description | Sample |
|---|---|---|---|---|
1 | Date | Date | Date at end of interval | 30/11/2009 |
2 | Portfolio | String | Name of portfolio | STF1 |
3 | Security ID | String | Identifier for security | BB150511 |
4 | Market weight | Double | Market weight of security within portfolio | 0.1443 |
5 | Base currency return | Double | Base currency return of security | -0.00322 |
6 | Local currency return | Double | Local currency return of security | -0.00322 |
In addition, information on the bill's yield to maturity, modified duration and convexity can also be supplied, if available:
| Field number | Field | Type | Description | Sample |
|---|---|---|---|---|
7 | Yield to maturity | Double | Yield to maturity at end of current interval | 0.0454 |
8 | Modified duration | Double | Modified duration at end of current interval | 0.54 |
9 | Convexity | Double | Convexity at end of current interval | 1.22 |
Example 1[edit]
A bank bill is issued in AUD with a maturity date of 15th June 2011. The bill has a AAA credit rating, and is priced off the AUD_CURVE yield curve.
This security is represented by a single entry in the security definition file:
| Security ID | Name | Start date | Security type | Currency | Yield curve | Maturity | Credit rating |
|---|---|---|---|---|---|---|---|
BB150511 | 15-05-11 Bank bill | BILL | AUD | AUD_CURVE | June 15, 2011 | AAA |
The Start date field is left blank, indicating that all supplied characteristics remain unchanged during the bill's lifetime.
The security has the corresponding entries in the returns file:
| Date | Portfolio | Security ID | Market weight | Base currency return | Local currency return | YTM | MD | C |
|---|---|---|---|---|---|---|---|---|
March 12, 2010 | STF1 | BB150111 | 0.0422 | 0.0001232 | 0.0001232 | 0.0443 | 0.521 | 1.044 |
April 12, 2010 | STF1 | BB150111 | 0.0422 | 0.0001232 | 0.0001232 | 0.0445 | 0.519 | 1.042 |
May 12, 2010 | STF1 | BB150111 | 0.0426 | 0.000128 | 0.000128 | 0.0449 | 0.516 | 1.029 |
0 | 0 | 0 | 0 | 0 | 0 |
These records show the weight and returns of the bill over successive days within the STF1 portfolio. Values for yield to maturity, moddified duration and convexity have been supplied, although these are optional.
Example 2[edit]
A bill is issued in USD with maturity date 20th Dec 2011. At issue, the bill was assigned a AA credit rating but was downgraded to AA- on 15th June 2011. This security is represented by two entries in the security definition file:
| Security ID | Name | Start date | Security type | Currency | Yield curve | Maturity | Credit rating |
|---|---|---|---|---|---|---|---|
MCORP2012 | Megacorp 20-Dec-2011 | BILL | USD | USD_CURVE | December 20, 2011 | AA | |
MCORP2012 | Megacorp 20-Dec-2011 | June 15, 2011 | BILL | USD | USD_CURVE | December 20, 2011 | AA- |
Both rows are identical except for the entries in the Start date and Credit rating column.