Recovery rate assumption cds
The recovery rate enables an estimate to be made of the loss that would arise in the event of default, which is calculated as (1 - Recovery Rate). Thus, if the recovery rate is 60%, the loss given default or LGD is 40%. On a $10 million debt instrument, the estimated loss arising from default is thus $4 million. In the case of a bond, its recovery rate can refer to a recovery rate of its principal only or to a recovery rate of both its principal and accrued interests. A recovery rate can also be deterministic or random. However, under the assumption that a recovery rate is independent of other variables, The fixed recovery CDS is a CDS where the payment on the occurrence of a credit event is par less the agreed recovery. The difference between a digital CDS and a fixed recovery CDS is merely of documentation.