Question

A 5-year credit default swap requires a quarterly payment at the rate of 60 basis points per year. The principal is $$\$ 300$$ million and the credit default swap is settled in cash. A default occurs after 4 years and 2 months, and the price of the cheapest deliverable bond is estimated as $40 \%$ of its face value shortly after the default. List the cash flows and their timing for the seller of the credit default swap.

   A 5-year credit default swap requires a quarterly payment at the rate of 60 basis points per year. The principal is $$\$ 300$$ million and the credit default swap is settled in cash. A default occurs after 4 years and 2 months, and the price of the cheapest deliverable bond is estimated as $40 \%$ of its face value shortly after the default. List the cash flows and their timing for the seller of the credit default swap.

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Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 25, Problem 2

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Step 1

- Annual rate = 60 basis points = 0.006 per year. - Quarterly rate = 0.006 / 4 = 0.0015. - Quarterly premium = 0.0015 × $300,000,000 = $450,000 per quarter. Show more…

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A 5-year credit default swap requires a quarterly payment at the rate of 60 basis points per year. The principal is $$\$ 300$$ million and the credit default swap is settled in cash. A default occurs after 4 years and 2 months, and the price of the cheapest deliverable bond is estimated as $40 \%$ of its face value shortly after the default. List the cash flows and their timing for the seller of the credit default swap.

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