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Suppose that the risk-free zero curve is flat at 6% per annum with continuous compounding and that defaults can occur at times 0.25 years, 0.75 years, 1.25 years, and 1.75 years in a 2- year plain vanilla credit default swap with semiannual payments. Suppose that the recovery rate is 20% and the probabilities of default are 190 at times 0.25 years and 0.75 years, and 1.5% at times 1.25 years and 1.75 years. Probability of survival after 6, 12, 18, and 24 month periods are: 0.99, 0.98, 0.965, 0.95. Find the swap equilibrium rate, s.

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Financial Management, Finance

Category:- Financial Management
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