CDS Pricing 3: Upfront Amounts and Fixed Coupons

Sometimes upfront payments are necessary if the credit is so risky that a productions seller is unwilling to receive the bulk of the premium through multiple payments over time. This is because there is a high probability that the name will default and the payments will cease. Here we calculate the mark-to-market value of an existing transaction and the upfront payment for a standard CDS transaction. We also consider the effects of differing recovery rates on CDS values.