Consider a CDS on Lehman Brothers default event. Given today’s market conditions you know that the present value of expected premium payments 6.0250*s, the present value of expected accrual payments is 0.0515*s and the present value of expected payoff is 0.1325. All measured per $1 of notional principal. You also know that Argo hedge fund bought this CDS on Lehman Brothers default from AIG one week ago with contractual rate of X basis points per year. Given this information the breakeven spread (i.e. the value of s) is _________ and today’s value of the CDS contract to AIG is positive if the value of s is _______ than X.

1. 222 basis points; greater
2. 218 basis points; smaller
3. 218 basis points; greater
4. 222 basis points; smaller
5. 84 basis points; greater

Answer rating: 100% (QA)

222 basis points smaller Reason Even though credit default swaps CDS are basically insurance policie... View the full answer