defprobstrip

Bootstrap defprobcurve object from market CDS instruments

Syntax

OutCurve = defprobstrip(ZeroCurve,MarketInstruments,MarketQuotes)

OutCurve = defprobstrip(___,Name,Value)

Description

OutCurve = defprobstrip(ZeroCurve,MarketInstruments,MarketQuotes) bootstraps a defprobcurve object from market CDS instruments.

OutCurve = defprobstrip(___,Name,Value) specifies options using one or more name-value pair arguments in addition to any of the input argument combinations in the previous syntax.

Examples

Bootstrap Default Probability Curve from Market CDS Instruments

This example shows how to use defprobstrip to bootstrap a defprobcurve object based on market CDS instruments.

Create ratecurve Object for Zero-Rate Curve

Create a ratecurve object using ratecurve.

Settle = datetime(2017,9,15);
ZeroTimes = [calmonths(6) calyears([1 2 3 4 5 7 10 20 30])];
ZeroRates = [0.0052 0.0055 0.0061 0.0073 0.0094 0.0119 0.0168 0.0222 0.0293 0.0307]';
ZeroDates = Settle + ZeroTimes;
ZeroCurve = ratecurve("zero",Settle,ZeroDates,ZeroRates);

Market CDS Spreads and Vector of Market CDS Instruments

Define the market CDS spreads and use fininstrument to create a vector of market CDS instrument objects.

SpreadTimes = [1 2 3 4 5 7 10 20 30]';
Spread = [140 175 210 265 310 360 410 460 490]';
MarketDates = datemnth(Settle,12*SpreadTimes);
  
NumMarketInst = length(MarketDates);
ContractSpreadBP = zeros(NumMarketInst,1);
  
MarketCDSInstruments(NumMarketInst,1) = fininstrument("cds", ...
      'ContractSpread', ContractSpreadBP(end), 'Maturity', MarketDates(end));
  for k = 1:NumMarketInst
      MarketCDSInstruments(k,1) = fininstrument("cds", ...
          'ContractSpread', ContractSpreadBP(k), 'Maturity', MarketDates(k));
  end

Use defprobstrip to create a defprobcurve object.

DefaultProbCurve = defprobstrip(ZeroCurve,MarketCDSInstruments, Spread)

DefaultProbCurve = 
  defprobcurve with properties:

                  Settle: 15-Sep-2017
                   Basis: 2
                   Dates: [9×1 datetime]
    DefaultProbabilities: [9×1 double]

Input Arguments

ZeroCurve — Zero-rate curve

ratecurve object

Zero-rate curve, specified by a previously created ratecurve.

Data Types: object

MarketInstruments — Market CDS instruments

vector

Market CDS instruments, specified as an NINST-by-1 vector.

Data Types: double

MarketQuotes — Market spread

vector

Market quotes, specified as an NINST-by-1 vector.

Data Types: double

Name-Value Arguments

Specify optional pairs of arguments as Name1=Value1,...,NameN=ValueN, where Name is the argument name and Value is the corresponding value. Name-value arguments must appear after other arguments, but the order of the pairs does not matter.

Before R2021a, use commas to separate each name and value, and enclose Name in quotes.

Example: DefaultProbCurve = defprobstrip(ZeroCurve, MarketInstruments, MarketQuotes,'QuoteType',"upfront")

QuoteType — Market quote type

"fairspread" (default) | string with value of "fairspread" or "upfront" | character vector with value of 'fairspread' or 'upfront'

Frequency of payments per year, specified as the comma-separated pair consisting of 'QuoteType' and a scalar character vector or string.

• "fairspread" — CDS break-even spread for zero upfront price

• "upfront" — CDS upfront price for a given contractual spread

Data Types: char | string

ProbDates — Dates for probability data

NINST-by-1 vector of maturity dates in MarketInstruments input (default) | datetime array | string array | date character vector

Dates for probability data, specified as the comma-separated pair consisting of 'ProbDates' and a P-by-1 vector of dates for the output defprobcurve object, given as a datetime array, string array, or date character vectors.

To support existing code, defprobstrip also accepts serial date numbers as inputs, but they are not recommended.

Output Arguments

OutCurve — Default probability curve

defprobcurve object

Default probability curve, returned as a defprobcurve object with the following properties:

• Settle

• Basis

• Dates

• DefaultProbabilities

More About

Credit Default Swap

A credit default swap (CDS) is a derivative that allows investors to hedge against credit default or speculate on an entity's creditworthiness.

A CDS) involves a protection buyer, who seeks protection against credit risk, and a protection seller, who provides that protection for regular premium payments. The contract specifies the reference entity whose credit risk is covered. If a credit event like a default or significant downgrade occurs, the seller must pay the buyer the difference between the debt's face value and recovery value. Settlement can occur through physical delivery, where the buyer exchanges the defaulted debt for its face value, or cash settlement, where the seller pays the buyer the difference in cash.

Version History

Introduced in R2020a

R2022b: Serial date numbers not recommended

Although defprobstrip supports serial date numbers, datetime values are recommended instead. The datetime data type provides flexible date and time formats, storage out to nanosecond precision, and properties to account for time zones and daylight saving time.

To convert serial date numbers or text to datetime values, use the datetime function. For example:

t = datetime(738427.656845093,"ConvertFrom","datenum");
y = year(t)

y =

        2021

There are no plans to remove support for serial date number inputs.