In an April 21, 2011 article in Bloomberg.com by Abigail Moses entitled, “Greece, Portugal Sovereign Credit-Default Swaps Jump to Records,”(www.bloomberg.com/news/2011-04-21/greece-portugal-sovereign-credit-default-swaps-jump-to-records.html), the following statement appears:
“Credit-default swaps on Greece jumped 40 basis points to 1,340 basis points according to CMA, signaling a 68 percent chance of default within five years.”
(a) How is the “68 percent chance of default” obtained?
(b) What assumptions must be made to use this estimate of default?