2. The iTraxx crossover index followed the path given below during three successive time periods:

f330; 360; 320g Assume that there are 30 reference names in this portfolio.

a. You decide to select a leverage ratio of 2 and structure a five-year CPPI note on iTraxx crossover index. LIBOR rates are 5%. Describe your general strategy and, more important, show your initial portfolio composition.

b. Given the path above, calculate your portfolio adjustments for the three periods.

c. In period four, iTraxx becomes 370 and one company defaults. Show your portfolio adjustments. (Assume a recovery of 40%. Reminder: Do not forget that there are 30 names in the portfolio.)