Hello everyone, this is my first post. Iâm a beginner novice learning about credit default swaps and relative value trades and I came across a case study with this explanation. I have spent hours trying to decipher this, but I am struggling. Please help.
â...putting a relative value trade will cost Â£15.5k over 6 months. Â£13k of the Â£15.5k can be attributed to roll down. In order to break even on this trade, the absolute price ratio needs to converge from the current level of 1.4 down to 1.32. Considering the current state of Yâs credit and looking at historical data, it is believed that the price ratio will reach 1.2 (ratio at just after issuance) resulting in 18k profit.â
Some Info: X-spread = 567, Y-spread = 403. Therefore spread ratio, 5.7:4 = 1.4:1
How has Â£18k been calculated? Iâm sure itâs very simple, but Iâd appreciate if someone could point it out to me.
Thank you very much. I hope I've posted in the correct place; apologies if this is not so.
Actully the profit will be 17K.