CDS Applications and the Basis Trade
For the CDS purchase for Future Solution Tech, Willard will _most likely_ :
Incorrect.
This answer incorrectly calculates the required formula.
Incorrect.
This answer incorrectly applies the duration in the equation.
You got it!
First, determine the credit spread on Future Solution Tech bonds.
$$\displaystyle \text{Yield - MRR}= 0.04 - 0.02 = 0.02$$
$$\displaystyle \text{Premium}= (\mbox {CDS Spread - CDS Coupon}) $$
$$\displaystyle \times \text{Duration} \times \mbox {Notional Value}$$
$$\displaystyle (0.02 - 0.03) \times 5 \times 100{,}000{,}000 = - 5{,}000{,}000$$
Since the value is negative, the value will be received by Willard.
pay EUR 5,000,000.
receive EUR 1,250,000.
receive EUR 5,000,000.
