A repo curve is defined as an adjustment to the discount curve in the pricing of a bond/FRN, when the credit default swaps (CDS) market implied default probability of the issuer is used in the pricing. We have changed the repo curve generation methodology.
Instead of a fixed term structure, the repo curve for each issuer in essence becomes “repo collections” in which a constant repo factor is stored with respect to each outstanding bond with same issuer. The computation of the repo factor for each bond remains unchanged.
The default probability of the issuer is described by the hazard rate curve, which is calibrated by market information of CDS trades with the issuer being the reference entity. With this definition the default probability functions is built upon the hazard rate curve.
With certain probability the bond won’t default before maturity. In this case the bondholder receives coupons at coupon payment dates and principal at maturity. However, there is a possibility that the bond will default before maturity thus the bondholder will only receive a recovered value based on principal plus accrued coupon.
For any products and data that have credit risk, we need to consider credit risk migirating techniques, such as collateral management.
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