CDS & IRS Vendor Pricing
Best Practices Guide
Last Update:
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OVERVIEW
Eagle models all Credit Default Swap (CDS) contracts as long positions, with Interest Rate Swaps (IRS) typically held long as well. Therefore the signage of market value is controlled by the sign of the price, which requires Accounting to support both positive and negative prices. This document details how to adjust a par-based price (around 100), such as those quoted by Bloomberg, to be used in Eagle's par-zero (around 0) pricing methodolgy. All calculations assume a Price Multiplier (18) = 0.01.
CREDIT DEFAULT SWAP
Sell Protection
In this example of selling protection on GE Capital Corp, the Bloomberg price is 91.4880439. The formula below should be used to convert Bloomberg’s price to a price consistent with Eagle processing:
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| Market Value | = 10,000,000 * -8.5119561 * 0.01 |
| Market Value Income | = -851,195.61 + 56,944.44 = -794,251.17 |
Buy Protection
In this example of buying protection on GE Capital Corp, the Bloomberg price is 91.4880439. The formula below should be used to convert Bloomberg’s price to a price consistent with Eagle’s processing:
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| Market Value | = 10,000,000 * 8.5119561 * 0.01 |
| Market Value Income | = 851,195.61 - 56944.44 = 794,251.17 |
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Zero Price
Depending on a company’s financial position, a CDS on its debt can be priced at zero. The reference obligation for the following CDS example is issued by GE. This represents the market’s belief that there is virtually no probability of GE defaulting.
Whether selling or buying protection, in this case the formula used to calculate a price for Eagle will be 100 - 100 = 0.
INTEREST RATE SWAP
Pay Float/Receive Fixed
Bloomberg quotes a principal (excluding accrued interest) of -4,151.25 for 1MM notional. Bloomberg trade screens don’t quote this in terms of a price, they supply a total amount. It can be converted to a par-zero price as Eagle requires using this formula:
- Price = Principal / Notional / Price Multiplier
- Price = -4,151.25 / 1,000,000 / 0.01
- Price = -0.415125
Contract-Level Valuations
The contract captures market value due to price change while the legs accrue interest payable and receivable. Market value on the legs will always be zero with market value income = accrued interest.
| Market Value | = 1,000,000 * -0.415125 * 0.01 |
| Market Value Income | = -4,151.25 (accruals captured separately on each leg) |
Pay Fixed/Receive Float
With the swap reversed, Bloomberg quotes a principal (excluding accrued interest) of 4,151.25 for 1MM notional. This can be converted to a par-zero price as Eagle requires using the same formula:
- Price = Principal / Notional / Price Multiplier
- Price = 4,151.25 / 1,000,000 / 0.01
- Price = 0.415125
Contract-Level Valuations
The contract captures market value due to price change while the legs accrue interest payable and receivable. Market value on the legs will always be zero with market value income = accrued interest.
| Market Value | = 1,000,000 * 0.415125 * 0.01 |
| Market Value Income | = 4,151.25 (accruals captured separately on each leg) |
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