Question

Verify that, if the CDS spread for the example in Tables 25.1 to 25.4 is 100 basis points, the hazard rate must be $1.63 \%$ per year. How does the hazard rate change when the recovery rate is $20 \%$ instead of $40 \%$ ? Verify that your answer is consistent with the implied hazard rate being approximately proportional to $1 /(1-R)$, where $R$ is the recovery rate.

   Verify that, if the CDS spread for the example in Tables 25.1 to 25.4 is 100 basis points, the hazard rate must be $1.63 \%$ per year. How does the hazard rate change when the recovery rate is $20 \%$ instead of $40 \%$ ? Verify that your answer is consistent with the implied hazard rate being approximately proportional to $1 /(1-R)$, where $R$ is the recovery rate.

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Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 25, Problem 14

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Step 1

The CDS spread represents the annual premium that the protection buyer pays to the protection seller for the credit protection. It is expressed in basis points, where 1 basis point is equal to 0.01%. The hazard rate, on the other hand, represents the probability Show more…

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Verify that, if the CDS spread for the example in Tables 25.1 to 25.4 is 100 basis points, the hazard rate must be $1.63 \%$ per year. How does the hazard rate change when the recovery rate is $20 \%$ instead of $40 \%$ ? Verify that your answer is consistent with the implied hazard rate being approximately proportional to $1 /(1-R)$, where $R$ is the recovery rate.

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