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
icon
Related questions
Question
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
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
Expert Solution
steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Risk and Return
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education