Assume that the hazard rate for a company is and the recovery rate is R. The
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Assume that the hazard rate for a company is λ and the recovery rate is R. The risk-free interest rate is 5% per annum. Default always occurs half way through a year. The spread for a five-year plain vanilla CDS where payments are made annually is 120 basis points and the spread for a five-year binary CDS where payments are made annually is 160 basis points. Estimate R and λ.
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