On 3 March 2020, five-year credit default swaps (CDS) on the senior US dollardenominated debt of ANZ Banking Group were trading at 39.39 basis points, up from 25.55 basis points on 20 February 2020. These prices assumed a recovery rate of 40% on the debt of the reference entity.

Required

(a) Build an Excel model to estimate the implied probability of ANZ defaulting during a year conditional on no earlier default, as at 3 March 2020. You should assume that defaults always occur at mid-year, triggering an accrual payment, and that premium payments on the CDS are made once a year at the end of the year. The swap curve is flat in Australia, with swap rates of 2.0% p.a., continuously compounded, at all maturities. (5 marks)

(b) Why did CDS prices rise between late February and early March 2020?