CDS spread and CS01

[Ryan S]

Can someone remind me how CS01 is derived from the traded spread of CDS? I am blanking on this.

The context is in terms of looking at potential shocks (i.e. 50%, or 60%) of the current spread, and what upfront margin to charge in a CDS trade. The upfront margin will mitigate the potential movement in the MTM of a bilateral trade, and a counterparty's inability to meet that margin call.

Thanks,
Ryan

 

[NNath]

Hi Ryan, Ref - Malz Chaper 7

DV01, is the mark-to-market gain on a bond for a one basis point change in interest rates. There is an analogous concept for credit spreads, the “spread01,” sometimes called DVCS, which measures the change in the value of a credit-risky bond for a one basis point change in spread.

For a credit-risky bond, we can measure the change in market value corresponding to a one basis point change in the z-spread. We can compute the spread01 the same way as the DV01: Increase and decrease the z-spread by 0.5 basis points, reprice the bond for each of these shocks, and compute the difference.

Hope that's what you are looking for.

 

[Ryan S]

Thank you Niket!

Can I derive the CS01 from the traded spread of a Credit Default Swap (CDS)? This part I'm still not clear on.