A credit default swap that provides hedge against default losses and which has a floating premium that resets on periodical basis (quarterly or semiannually). With a constant maturity credit default swap (CMCDS), it is possible to separate default risk from spread risk, and hence lessen sensitivity to changes in the credit spread. Broadly speaking, the CMCDS doesn’t differ considerably from the vanilla CDS.
The main difference, however, lies in that the periodic spread payment (i.e., the premium paid by the protection buyer to the protection provider) in the CMCDS is floating, not fixed as with a regular CDS. This premium payment is often related to (and expressed as a percentage of) a specific currently quoted constant maturity reference rate such as a 5-year CDS rate. Moreover, the premium could be linked to a CDS index. Notwithstanding, the amount of this premium would reset periodically based on the current level of a given reference CDS.
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