Struck off

Credit default swaps (CDSs) offer protection against issuer default, and in general the protection is paid via a running spread rather than upfront. When the par spread changes, the contract cannot be unwound without leaving a default-contingent annuity. Although the valuation of that annuity is straightforward, its risk management on a trading book is not, and it is common market practice to charge a 'haircut' for unwinds or assignment trades, though as yet there is no market standard for their calculation. In this article, Richard Martin, Helen Haworth and Fer Koch discuss these issues in depth and show how to hedge annuities with regular CDSs, thereby obtaining a fair price for the haircut

In a credit default swap (CDS), the protection buyer pays an agreed running premium, usually quarterly, and does so until a credit event occurs, or the contract expires, whichever is sooner. In the event of default, he receives a payment equal to par minus the recovered part of the reference obligation. The value of the premium that makes the default and premium legs balance is called the par spread, and it changes as the market moves.

Suppose a counterparty, ABC, bought five-year protection on