. 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