Consider a CDS on Lehman Brothers default event. Given today's market conditions you know that the present value of expected premium payments 6.0250*s, the present value of expected accrual payments is 0.0515*s and the present value of expected payoff is 0.1398. All measured per $1 of notional principal. You also know that Argo hedge fund bought this CDS on Lehman Brothers default from AIG one week ago with contractual rate of X basis points per year. Given this information the breakeven spread (i.e. the value of s) is and today's value of the CDS contract to AIG is negative if the value of s is than X. a. 230 basis points; greater b. 43 basis points; smaller c. 234 basis points; greater d. 230 basis points; smaller e. 43 basis points, greater I
Consider a CDS on Lehman Brothers default event. Given today's market conditions you know that the present value of expected premium payments 6.0250*s, the present value of expected accrual payments is 0.0515*s and the present value of expected payoff is 0.1398. All measured per $1 of notional principal. You also know that Argo hedge fund bought this CDS on Lehman Brothers default from AIG one week ago with contractual rate of X basis points per year. Given this information the breakeven spread (i.e. the value of s) is and today's value of the CDS contract to AIG is negative if the value of s is than X. a. 230 basis points; greater b. 43 basis points; smaller c. 234 basis points; greater d. 230 basis points; smaller e. 43 basis points, greater I
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Consider a CDS on Lehman Brothers default event. Given today's market conditions you
know that the present value of expected premium payments 6.0250*s, the present value of
expected accrual payments is 0.0515*s and the present value of expected payoff is 0.1398.
All measured per $1 of notional principal. You also know that Argo hedge fund bought this
CDS on Lehman Brothers default from AIG one week ago with contractual rate of X basis
points per year. Given this information the breakeven spread (i.e. the value of s) is
and today's value of the CDS contract to AIG is negative if the value of s is
than X
a 230 basis points; greater
b. 43 basis points: smaller
C. 234 basis points, greater
d. 230 basis points; smaller
le. 43 basis points; greater
I
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