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Consider a CDS on Lehman Brothers default event. Given todays market conditions you know that the present value of expected premium payments 6.0250*s, the present

Consider a CDS on Lehman Brothers default event. Given today’s market conditions you know that the present value of expected premium payments 6.0250*s, the present value of expected accrual payments is 0.0515*s and the present value of expected payoff is 0.1325. All measured per $1 of notional principal. You also know that Argo hedge fund bought this CDS on Lehman Brothers default from AIG one week ago with contractual rate of X basis points per year. Given this information the breakeven spread (i.e. the value of s) is _________ and today’s value of the CDS contract to AIG is positive if the value of s is _______ than X.

  1. 222 basis points; greater
  2. 218 basis points; smaller
  3. 218 basis points; greater
  4. 222 basis points; smaller
  5. 84 basis points; greater

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