Question
A hedge fund is positive on the credit evolution of acompany (improvement of creditworthiness)and rather than buying bonds, he decides togetexposure through the credit derivatives
A hedge fund is positive on the credit evolution of acompany (improvement of creditworthiness)and rather than buying bonds, he decides togetexposure through the credit derivatives market. He trades the 5 years CDS for an amount of 100 Million. The coupon of the CDS is 500 bps, the spread is 400 bps and the PV01 is 5. -Should he buy or sell the CDS? -What is the initial fee? Does he pay or receive the fee? -After 1 year, the PV01 of the CDS is 4 Calculate his P&L if the CDS trades at 300bps Calculate his P&L if the company defaults at this date and the recovery value is 40%.
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To answer the questionslets first understand the basics of credit default swaps CDS CDS Basics A CDS is a financial contract where the seller agrees t...
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Advanced Accounting
Authors: Floyd A. Beams, Joseph H. Anthony, Bruce Bettinghaus, Kenneth Smith
11th Edition
978-0132568968, 9780132568968
