Upfront Premium on CDS

[Dcon23]

I get the concept and how it basically is a way to remedy the fact that CDS fixed premium convention is 1% for IG CDS and 5% for HY CDS. My question is what is the exact reason the convention would be like this? Is there any rhyme or reason to this convention? I guess it effects the duration of the CDS and perhaps is a way to mitigate credit risk for the winner of the trade since instead of paying most of the CFs in the middle, they would be paid up front. Curious what everyone else’s thoughts are on this, thanks.

 

[rexthedog]

I skipped CDS, its the only area of derivatives I dont know like the back of my hand. I will be praying to the Sun God Ra, that no CDS crap comes up

 

[S2000magician]

Dcon23 wrote:My question is what is the exact reason the convention would be like this?

Got me.

Dcon23 wrote:Is there any rhyme or reason to this convention?

I doubt it.
However, we’re left to deal with it.
Sigh.

 

[JZA]

It’s to standarize the contracts, so they can be easily traded. The rates are like a spread so junk has to pay a higher rate.

 

[Flashback]

It’s like a put option or ordinary insurance claim.