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CJ Brokerage (CJ) owns a $10 million face value corporate bond issued by CoMel Inc. (CoMel). In order to protect itself against credit default by CoMel, CJ enters into a 3-year credit default swap (CDS) with Saalb International (Saalb) on a notional principal equal to the face value of the bonds, with a CDS spread of 40 basis points, payable semi-annually on January 1 and July 1 of each year. Calculate the approximate payment by CJ and Saalb, if any, if default occurs on October 1 of the second year. The CDS specifies physical settlement and the market value of the bond at default is $0.70 on the dollar.
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