Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

. Question 4 (14 marks) A financial institution has purchased a two-year plain vanilla credit default swap with semi-annual payments to protect themselves against counterparty

image text in transcribed
. Question 4 (14 marks) A financial institution has purchased a two-year plain vanilla credit default swap with semi-annual payments to protect themselves against counterparty default. Suppose that the risk-free zero curve is flat at 7% per annum with continuous compounding and that defaults can occur at times 0.25 years, 0.75 years, 1.25 years, and 1.75 years in. Suppose that the recovery rate is 30% and the unconditional probabilities of default (as seen at time zero) are 1% at times 0.25 years and 0.75 years, and 2% at times 1.25 years and 1.75 years. a) What is the credit default swap spread? (8 marks) b) What would the credit default spread be if the instrument were a binary credit default swap? (3 marks) c) What is the value of the swap in part a) per dollar of notional principal to the financial institution (protection buyer) if the credit default swap spread is 180 basis points? (3 marks) w . Question 4 (14 marks) A financial institution has purchased a two-year plain vanilla credit default swap with semi-annual payments to protect themselves against counterparty default. Suppose that the risk-free zero curve is flat at 7% per annum with continuous compounding and that defaults can occur at times 0.25 years, 0.75 years, 1.25 years, and 1.75 years in. Suppose that the recovery rate is 30% and the unconditional probabilities of default (as seen at time zero) are 1% at times 0.25 years and 0.75 years, and 2% at times 1.25 years and 1.75 years. a) What is the credit default swap spread? (8 marks) b) What would the credit default spread be if the instrument were a binary credit default swap? (3 marks) c) What is the value of the swap in part a) per dollar of notional principal to the financial institution (protection buyer) if the credit default swap spread is 180 basis points? (3 marks) w

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Behavioral Finance And Asset Prices

Authors: David Bourghelle, Pascal Grandin, Fredj Jawadi, Philippe Rozin

1st Edition

3031244850, 978-3031244858

More Books

Students also viewed these Finance questions

Question

Find lim.(ar in x) lim (x In r

Answered: 1 week ago