(20) Consider the iTraxx Europe 5-year index (newly constituted). With quarterly payments and a quoted CDS spread on the index of 24 bps, find the corresponding constant conditional default probability (conditional on no default in earlier periods) expressed as a default intensity. Assume a 40% recovery rate and that the term structure of risk-free rates is flat at 3.5%.

(b) (20) Price the equity tranche of the iTraxx Europe 5-year index again with the assumptions stated above (and use your result from (a) for the constant hazard rate in equation (25.6),Equation (25.6) : Q(t) = 1 -e - but also assume a copula correlation of 0.15. Use an M=60 Gaussian quadrature to find the unconditional values necessary to determine the solution.

(C) if the quote price of the equity tranche was 11.25%, which is the implied compound correlation and is the implied base correlation?