Investor A enters in a Par/Par Asset Swap agreement with Bank B. He decides to buy from the bank, $1milion of a 2yr corporate bond with 7% coupon, semi annualized payments.

As per the swap agreement he will pay the bank the swap rate and get LIBOR. The payments are semi-annual and the notional is USD1milion. You observe the following annualized data.

Questions:

1. What is the asset swap spread of the above agreement?

2. What does ASW represents?

3. How is it related to the CDS?

4. If the investors, in addition to the ASW, decides to enter into a CDS contract as a buyer, what

   risks does he ultimately facing?

Forward Rates for the Period Year Bond 1 0.5 6.25 6.76 3 7.27 1.5 7.80 Nr of Days Current Libor Forward rates for Libor Year 0.5 180 5.2500 180 5.7572 1.5 180 6.2733 180 6.7994