survives without a default being triggered, in which case a premium payment of is made, shown in blue. At either side of the diagram are the cashflows up to that point in time with premium payments in blue and default payments in red. If the contract is terminated the square is shown with solid shading. The probability of surviving over the interval to without a default payment is and the probability of a default being triggered is . The calculation of present value, given discount factor of to is then The probabilities , , , can be calculated using the credit spread curve. The probability of no default occurring over a time period from to decays exponentially with a time-constant determined by the credit spread, or mathematically where is the credit spread zero curve at time . The riskier the reference entity the greater the spread and the more rapidly the survival probability decays with time. To get the total present value of the credit default swap we multiply the probability of each outcome by its present value to give Grouped by cash flow direction (receiving protection and paying premium): No-arbitrage model In the "no-arbitrage" model proposed by both Duffie, and Hull-White, it is assumed that there is no risk free arbitrage. Duffie uses the LIBOR as the risk free rate, whereas Hull and White use US Treasuries as the risk free rate. Both analyses make simplifying assumptions (such as the assumption that there is zero cost of unwinding the fixed leg of the swap on default), which may invalidate the no-arbitrage assumption. However the Duffie approach is frequently used by the market to determine theoretical prices. Under the Duffie construct, the price of a credit default swap can also be derived by calculating the asset swap spread of a bond. If a bond has a spread of 100, and the swap spread is 70 basis points, then a CDS contract should trade at 30. However, there are sometimes technical reasons why this will not be the case, and this may or may not present an arbitrage opportunity for the canny investor. The difference between the theoretical model and the actual price of a credit default swap is known as the basis. Criticisms Critics of the huge credit default swap market have claimed that it has been allowed to become too large without proper regulation and that, because all contracts