Standard CDS vs Upfront CDS

J

Jack o-o

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Hi all,
Any chance someone could explain to me the difference between a standard Credit Default Swap (CDS) and one with an upfront fee, and what a “running spread” is in the context of a CDS?
Also interested in the risk differences between the two if possible.
Many thanks,
Jack
 
on a “regular” CDS there is no upfront cost to enter the in the contract. The first exchange of money happens on first coupon date. With upfront fees, you either pay or get paid to enter into the contract. This usually happens when spreads are > 1000. Also, this is for single name CDS. Why this is done, I’m not sure, but would assume it has to do with lowering the default rate of the coupon pmts - you pay a big chunk of it uprfront
Indicies work a bit differntly, but your upfront pmt is based on the diff between the spread you the did trade at and the fixed rate of the index. So for example, if you sold protection on IG11 (Investment grade index) @ 500 and the fixed rate on that was 135, your up front premium would the difference between 135 and 500bps for the life of the contract (ie, if there were 10 total coupon pmts, you would get the difference for the 10 coupon pmts)
 
to add on…when CDS is traded up front, it typically will trade in pts upfrnt + 500bp running. If a contract was quoted as 25pts up front, this means you would pay 25% of notional at the settlement date of the contract, and would pay 500bp/year for the remainder of the contract, given that no credit event occurs. The way the pts up front is determined is simply the risky present value of the spread in excess of 500bp.
 
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