Exercise 16.11 In Example 16.2, Suppose that r = 0.02, = 0.4, A = 1, and

Exercise 16.11 In Example 16.2, Suppose that r = 0.02, σ = 0.4, A = 1, and B = 0.7. Calculate the CDS premium cT numerically for 0.1 ≤ T ≤ 5.

Compare the term structure with the one observed in the actual market. Note:

When the firm-value process is modeled by a regime-switching (or stochastic volatility) L´evy process, a realistic term structure of the CDS premium can be obtained. See a recent paper by Kijima and Siu (2011) and references therein.