Problem: (a) (20) Consider the iTraxx Europe 5-year index (newly constituted). With quarterly payments and a quoted CDS spread on the index of 24 bps, find the corresponding constant conditional default probability (conditional on no default in earlier periods) expressed as a default intensity. Assume a 40% recovery rate and that the term structure of risk free rates is flat at 3.5%. (Hint: Refer to the technique used in the spreadsheet for Example 25.2 we are looking for the same default probability here, but with quarterly periods to facilitate the process described in Section 25.2. Consider reconstructing Hulls result for Example 25.2 as a check.)

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