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
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