1. CDS spread has some relationship with credit spread, but they are not the same thing

2. What your advisor says, in my opinion is something like pricing derivative with counter-party default risk, not credit derivative. For example, Citi buys an option from other financial institution, at last, the option ends in the money so Citi want to exercise, but the counter-party may default (e.g. do not have enough stock to make the delivery). In this case, this options price should also consider the default risk, which of course will make it cheaper.

If the default risk is from the counter-party, the credit spread you should use is from the counter-party not Citi. If the conter-party has some bonds in the market, you can use its yield minus the yield of the T-bond, to get the spread. I think Hull's book has some discussion and questions on this. Probablely Chapter 23 or 24 of the 8ed.

Of course, Citi can hedge the defualt risk with CDS, but that is probably not a direct hedge.

best,

Thank u for your help again.
In this case, the citibank has issued the bonus certificate. I think, the price of the certificate without credit risk is the theoretical price, which i have got it with the pricing formula. And for the investors or buyers of the bonus certificate, the counterparty is citibank. So, what i neeed to put in the the formula for the price with credit risk is the credit spread of citibank,right?
p.s.: what is T-bond?

我去，不要告诉我刚才发的一堆话没有发出去！！whats wrong

好吧，再来一遍。。。。
首先，先谢谢你的再次帮助，真是热心的好同志啊。。。
我现在研究的是Citibank发行的一种衍生品，叫bonus certificate,它的理论定价我已经通过公式得到了，以我的理解，这就是上面公式里需要的price without credit risk。对于购买它的人来说，counterparty 是citibank,price with credit risk是需要在考虑Citibank的credit spread的基础下算出来的，我理解的对吗？
还有请问，你上面提到的T bond是什么捏？？不能在某个网页直接找到citibank的credit spread么？？
万分感谢

如果是考虑这个衍生品的违约调整价值的话，其实从强度模型出发就能得到它的价值等于无违约的价值乘上一个违约调整项，这个调整项取决于违约概率和违约损失率，一般来讲cds的报价利差能够作为这两项乘积的近似。
对于这个问题我感觉如果这个衍生品的违约概率可以近似看做citi的违约概率的话那么它的违约价值调整可以近似看做cds市场上关于citi的报价利差x，也就是直接W(0)=EXP(-xT)*V(0)。你也可以理解为投资者要买这个产品的话肯定也担心citi会违约，那么定价的时候要把citi本身违约的可能给调整下，而citi自身违约的概率以及损失率基本上可以用cds spread来代替。