P1.T1. ch4 Dollar value of the payment vs default payment

[Phoenixchui]

what is the difference between Dollar value of the payment & default payment ?
Dollar value of the payment can be: par - recovery rate
default payment can be: par price + recovery factor

what is the difference?

 

[David Harper CFA FRM]

HI @Phoenixchui Good question. Candidly, I don't know exactly what we meant by the addition (+), it looks like a mistake to me. Consequently, we have just edited that section as follows:

Current:

"Default Payment

Typical default payments include:

• Through a dealer poll, the par price of the asset minus the post-default price of the underlying asset;
• The par price plus a recovery factor, which is the same as a pre-negotiated amount (digital swap);
• Payment of par by the seller in exchange for the physical delivery of the defaulted underlying asset."

Replace with:

"Default Payment

When a credit events triggers the CDS, the idea (similar to insurance) is for the protection seller to pay the net loss to the protection buyer. This contingent payoff as a percentage of the notional or par is given by (1 - recovery rate, RR) or loss given default (LGD). The three settlement methods are:

• Cash settlement with market recovery: par price minus the post-default price of the underlying asset determined via dealer poll or auction
• Cash settlement with fixed recovery: par price minus pre-negotiated recovery such as 40%
• Physical settlement: seller pays entire par amount and takes delivery of the defaulted underlying asset, in which case its value does not need to be determined (for purposes of the CDS)"