CDS Basis Adjustment Curve

CDS Basis Adjustment curves are used in the pricing of Index, Index Tranche, and Nth Loss Basket products.

The adjustment is performed on the Curve Points that are stored in a probability curve. Each Curve Point holds a survival probability as of the Curve Point’s date t. Call this P (t). Then an adjusted curve is created by copying the original curve, using the same dates t, and for each date changing P (t) to Padj (t), where Padj (t) = exp(-ht)*P(t).

The factor h is the basis adjustment which adjusts the probability curves so that the BE_Rate is equal to the Quoted value of the Index. It is the same for all curves in the index.

From the Calypso Navigator, navigate to Market Data > Credit Curves > Basis Adjustment (menu action marketdata.CurveCDSBasisAdjustmentWindow).

CDS Basis Adjustment Curve Quick Reference

Configuration

Define the reference entity basket using Configuration > Credit Derivatives > Reference Entity Basket from the Calypso Navigator.

Curve Generation

1. Click New to start a new curve.

2. Select the quote instance to use in the curve generation (CLOSE, LAST, or OPEN).

3. The Current checkbox is selected by default, meaning that when you save the curve, the system timestamps the curve with the current date and time. Clear the Current checkbox to enter a back-dated curve. You can modify the date and time fields.

4. Definition Panel — Select the following to define the curve: currency, click ... to select the reference entity basket, “Generate from instruments” should be checked, CDSBasisAdjustment generation algorithm, interpolator, Pricing Env.

5. Underlyings Panel — Select the underlying instruments.

6. Quotes Panel — Enter quotes manually, use quotes from the quote set, or use real-time quotes.

7. Points Panel — Click Generate to generate the points. You can modify the rates.

8. Click Save, enter a name for the curve, and click OK.

Pricer Configuration

Assign the CDS basis adjustment curve in the Credit panel for the CDS_BASIS_ADJ usage.

1. Creating a Curve

1.1 Definition Panel

Click New to start a new curve.

Select the following to define the curve: currency, click ... to select the reference entity basket, “Generate from instruments” should be checked, CDSBasisAdjustment generation algorithm, interpolator, Pricing Env.

You can set the following parameter when you select the CDSBasisAdjustment generator.

Parameter	Description
CALCULATE_BE_RATE	If set to true, then the break-even rate is calculated and displayed for each point on the curve in the Points panel. Default is true.
ROLL_TO_ZERO	If true, the adjustments on a rolled curve will be set to zero. This means that the pricer will not apply any basis adjustment to probability curves when the basis adjustment curve is rolled (stale). Defaults is false.

Parameter

Description

CALCULATE_BE_RATE

If set to true, then the break-even rate is calculated and displayed for each point on the curve in the Points panel.

Default is true.

ROLL_TO_ZERO

If true, the adjustments on a rolled curve will be set to zero. This means that the pricer will not apply any basis adjustment to probability curves when the basis adjustment curve is rolled (stale).

Defaults is false.

1.2 Underlying Panel

Click the Underlyings tab. Select the underlying instruments to use in the curve.

The basket’s underlyings are automatically displayed.

Click New/Edit Underlying to create new instruments.

Select instruments and click >> to add them to the instrument list in the right panel.

1.3 Quotes Panel

Click the Quotes tab. You can enter quotes and Save Quotes to the quote set associated with the selected pricing environment.

The quotes may be automatically populated if you are running a real-time feed, or they may be populated from the quote set associated with the selected pricing environment.

1.4 Points Panel

Click the Points tab. Click Generate to view the generated rates.

You can select the Graph panel to view the curve in graphical mode.

1.5 Save Curve

Click Save in the bottom of the curve window. Enter a name for the curve, and click OK.

2. Pricer Configuration

Following is an example of how to assign the curves in the Pricer Configuration.

From the Calypso Navigator, navigate to Market Data > Pricing Environment > Pricer Configuration, and click Load to select a pricer configuration.

Click the Credit tab.

Select type "Basket", and select a basket from the Basket field.

Select usage CDS_BASIS_ADJ, and select a basis adjustment curve from the Market Data field.

Click Add to add the curve to the list.

Click Save to save the pricer configuration.