Now assume a risk-neutral default intensity for company A of 10% and a risk-neutral loss given default of 30%. Suppose that the riskless spot curve is flat at 0%. Calculate the "at-market" annual spreads for 5-year and 10-year CDS contracts on company A. Show all the steps in your calculation.
Added by Ashley C.
Step 1
For a 5-year CDS: - Year 1: 1 - (0.10) = 0.90 - Year 2: (0.90)^2 = 0.81 - Year 3: (0.90)^3 = 0.729 - Year 4: (0.90)^4 = 0.6561 - Year 5: (0.90)^5 = 0.59049 For a 10-year CDS: - Year 1: 1 - (0.10) = 0.90 - Year 2: (0.90)^2 = 0.81 - Year 3: (0.90)^3 = 0.729 - Year Show more…
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Suppose that the risk-free zero curve is flat at 0.05 per annum with continuous compounding and that defaults can occur half way through each year in a new two-year credit default swap. Suppose that the recovery rate is 0.38 and the default probabilities each year conditional on no earlier default is 0.01 Estimate the credit default swap spread. Assume payments are made annually. Rates are quoted in numbers, i.e. 0.05 is 5% rate. Please write your answer also in numbers.
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