[2008] Topic 53: Credit Derivatives 相关习题 into, default, payments, recovery

wanganjie

 

AIM 3: Compute the value of credit default swaps, given unconditional default probabilities, survival probabilities, market yields, recovery rates and cash flows.

1、The survival probabilities and unconditional default probabilities for Bote Corp are listed in the table below. Baltimore Bay Investments has entered into a 4-year credit default swap (CDS) with Phili Investments to hedge against the credit risk of a $50 million bond issued by Bote Corp. Assume that payments on the CDS occur annually at the end of the year, and that defaults on the CDS occur halfway through each year. The risk-free rate is 6 percent, compounded continuously, and the recovery rate in the event that Bote Corp defaults is 40%. The probability that Bote Corp defaults during a year, conditional on no-earlier default is 2 percent.

Time (Years)	Default Probability	Survival Probability
1	0.0200	0.9800
2	0.0196	0.9604
3	0.0192	0.9412
4	0.0188	0.9224

Which of the following is closest to the present value of the total expected payments made by the buyer of the CDS?

A)    3.28s.

B)    3.98s

C)   5.61s

D)   3.32s.

wanganjie

 

The correct answer is D

The total value of expected payments made by the buyer of the CDS includes both the payments based on the spread and the expected accrual payment. Both are shown in the tables below.

PV of expected payments:

Time (Years)	Survival Probability	Expected Payment	PV of Expected Payment
1	0.9800	0.9800s	0.9229s
2	0.9604	0.9604s	0.8518s
3	0.9412	0.9412s	0.7861s
4	0.9224	0.9224s	0.7256s
		TOTAL	3.2864s

PV of the accrual payments in the event of default:

Time (Years)	Probability of Default	Expected Accrual Payment	PV of Expected Accrual Payment
0.5000	0.0200	0.0100s	0.0094s
1.5000	0.0196	0.0098s	0.0087s
2.5000	0.0192	0.0096s	0.0080s
3.5000	0.0188	0.0094s	0.0074s
		TOTAL	0.0335s

Present value of total expected payments = 3.2864s + .0335s = 3.3199s

wanganjie

 

2、Which is the following is closest to the present value of the payoff in the event that Bote Corp defaults?

A) 0.0335.

B) 0.0201.

C) 0.0317.

D) 0.0415.

wanganjie

 

The correct answer is D

Present value of the expected payment in the event of default:

Time (Years)	Probability of Default	Recovery Rate	Expected Payoff ($)	PV of Expected Payoff ($)
0.5000	0.0200	0.4000	0.0120	0.0116
1.5000	0.0196	0.4000	0.0118	0.0108
2.5000	0.0192	0.4000	0.0115	0.0099
3.5000	0.0188	0.4000	0.0113	0.0092
			TOTAL	0.0415

The present value of the expected payment in the event of default is .0415.

wanganjie

 

3、Which of the following best approximates the CDS spread for the 4-year CDS?

A) 273 basis points.

B) 157 basis points.

C) 125 basis points.

D) 172 basis points.

wanganjie

 

The correct answer is C

Equate the present value of total payments to the present value of the expected payoff in the event of default.

3.3199s = .0415, s = .0125, or 125 basis points.

wanganjie

 

4、A 4-year credit default swap (CDS) specifying physical delivery defaults at the end of two years. If the reference asset is a $100 million, 8.0% ABC corporate bond, and the CDS spread is 125 basis points, the buyer of the CDS will:

A) receive payments of 800 basis points for the next two years.

B) receive a payment of $167.5 million.

C) continue to receive payments of 675 basis points for the next two years.

D) deliver the bond and receive a payment of $100 million.

wanganjie

 

The correct answer is D

If the swap specifies physical delivery, the buyer of the swap will deliver the reference obligation to the seller and receive the par value of the obligation.

wanganjie

 

AIM 6: Identify and explain functions and uses of total return swaps.

1、An analyst is examining the cash flows of a total return credit swap. Which one of the following statements regarding total return credit swaps is least accurate?

A) The swap buyer receives any gain or loss of the underlying asset and assumes its credit risk.

B) The swap seller’s cash inflow equals LIBOR plus or minus a spread.

C) The swap seller eliminates its credit risk exposure.

D) The swap buyer assumes ownership of the reference asset.

wanganjie

 

The correct answer is D

The swap seller retains ownership of the reference assets and is required to pay any financing costs associated with the reference asset.