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Credit derivatives terminology

By Vinod Kothari

   

Constant maturity CDS (CMCDS): A CDS that offers a protection seller a certain spread over a reference rate, typically the prevailing CDS spread in the market, such that the returns of the protection seller vary with spreads in the market, hence protecting or mitigating the protection seller’s position from mark to market losses. The floating spread is priced such that the expected present value of the floating spread is equal to the prevailing fixed spread; hence a CMCDS protection seller will earn less if the spreads in the market remain at the current level, hoping to earn more when the spreads widen. Called as such since the protection seller will write market value loss only upon maturity – it is constant until then.

 

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