Question 2 Credit Derivatives (10 marks) A bond fund manager has invested $100 million of five-year subordinated bonds issued by a company. She now approaches a CDS dealer to buy a five-year CDS contract to hedge the credit risk on this holding. Required: Use the Hull and White model to calculate the dollar amount of the "fair" CDS annual premium assuming that defaults only occur at mid-year, the annual probability of default of the issuer conditional on no earlier default is 2%, standard recovery rates are 85% for senior debt and 70% for subordinated debt and all zero-coupon yields are 4% pa. (continuously compounded). Build an EXCEL spreadsheet model by using four tables in "Q2 tables" in "Assignment Two templates" to present your workings. Question 2 Credit Derivatives (10 marks) A bond fund manager has invested $100 million of five-year subordinated bonds issued by a company. She now approaches a CDS dealer to buy a five-year CDS contract to hedge the credit risk on this holding. Required: Use the Hull and White model to calculate the dollar amount of the "fair" CDS annual premium assuming that defaults only occur at mid-year, the annual probability of default of the issuer conditional on no earlier default is 2%, standard recovery rates are 85% for senior debt and 70% for subordinated debt and all zero-coupon yields are 4% pa. (continuously compounded). Build an EXCEL spreadsheet model by using four tables in "Q2 tables" in "Assignment Two templates" to present your workings