can answer botb A & B but with a main focus on B plesse.

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5. Hedging using CDS (6 marks) You would like to include corporate bonds into your exis. "oortfolio. To hedge the potential default risk, you decide to purchase CSD (credit default swap) _ B Bank A. Suppose that the risk-free zero curve is flat at 6% per annum with continuous compounding and that defaults can occur half way through each year in a new five-year credit default swap. Suppose that the recovery rate is 35% and the default probabilities each year condit nal on no earlier default is 3%. Assume payments are made annually. a. What is CSD? Is it risky? (2 marks) b. Estimate the credit default swap spread? (List your calculation process in tables). (4 marks) 5. Hedging using CDS (6 marks) You would like to include corporate bonds into your exis. "oortfolio. To hedge the potential default risk, you decide to purchase CSD (credit default swap) _ B Bank A. Suppose that the risk-free zero curve is flat at 6% per annum with continuous compounding and that defaults can occur half way through each year in a new five-year credit default swap. Suppose that the recovery rate is 35% and the default probabilities each year condit nal on no earlier default is 3%. Assume payments are made annually. a. What is CSD? Is it risky? (2 marks) b. Estimate the credit default swap spread? (List your calculation process in tables). (4 marks)