Question 2: Marking CDS trades to Market (30 marks) a) An investor buys protection on ABC Corp 5y CDS with a Par Spread of 300bp on a full running spread convention, the risky annuity at inception is 4.8. The assumed recovery is 40%. Six months later, the spread moves to 350bp and the investor enters an offsetting trade by selling protection. The risky annuity is now 4.2. What is the total P&L on the trade? (5 marks) b) After the offsetting trade has been entered, the spread of the ABC Corp CDS in the market widens to 800bp and the risky annuity falls to 2.5 (instantaneously, no passage of time). What is the total P&L after this move and why does it occur even after the trade has been closed out? (5 marks) Question 2: Marking CDS trades to Market (30 marks) a) An investor buys protection on ABC Corp 5y CDS with a Par Spread of 300bp on a full running spread convention, the risky annuity at inception is 4.8. The assumed recovery is 40%. Six months later, the spread moves to 350bp and the investor enters an offsetting trade by selling protection. The risky annuity is now 4.2. What is the total P&L on the trade? (5 marks) b) After the offsetting trade has been entered, the spread of the ABC Corp CDS in the market widens to 800bp and the risky annuity falls to 2.5 (instantaneously, no passage of time). What is the total P&L after this move and why does it occur even after the trade has been closed out