Answered step by step
Verified Expert Solution
Question
1 Approved Answer
answer these questions please, it is from derivative module (a) What does the acronym CVA stand for and what are its regulatory implications? (b) You
answer these questions please, it is from derivative module
(a) What does the acronym CVA stand for and what are its regulatory implications? (b) You have obtained the following default probabilities for a Standard and Poors B-rated company, Risky Corp.: (i.) Find the CDS spread, s, per dollar of notional. To facilitate computation, you can assume that payments are made annually in arrears and defaults occur at year end (no accrual calculations), and the expected recovery rate is 40%. (ii.) You are offered a market quote on this CDS at 400 basis points. Is there an arbitrage opportunity for you? How would you trade this? (iii) An investment bank is long $10 million of corporate bonds in Risky Corp., estimate the CVA assuming that the bonds reach maturity in one year. (c) A stock price is currently at $167.50 and the quotes in the following table are available for one month options on the stock: (i) Construct an option portfolio to profit from a low volatility forecast for the stock, plot the resulting payoff and report the portfolio cost. If the stock price in one month is $167.60 what is the profit on your trade? [6 marks] (ii) If each option contract covers 100 shares how many shares would you need to purchase/sell to delta hedge the portfolio in (i) Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started