The value of a derivative that pays off $100 after one year if a company has defaulted
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The value of a derivative that pays off $100 after one year if a company has defaulted during the year is $3. The value of a derivative that pays off $100 after one year if a company has not defaulted is $95. What is the risk‐free rate? What is the risk neutral probability of default?
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By buying both derivatives one is certain to ...View the full answer
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