The premium (measured in basis points) that is paid to the protection seller in a credit default swap (CDS) or a similar credit derivative. It is what a protection seller gets paid for the credit/ default protection (that is provided to a protection buyer). It is very much similar to a premium paid by a policyholder in an insurance contract. Determining the size of a CDS premium depends on a number of factors including credit risk (default probability) and expected losses (associated with the coverage).
In a standard CDS contract, the premium is paid on a regular basis (typically quarterly). However, upon default, the protection buyer is bound to pay accrued CDS premium.
Comments