Question 2: Marking CDS trades to Market (30 marks) a) An investor buys protection on ABC...

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Question 2: Marking CDS trades to Market (30 marks) a) An investor buys protection on ABC Corp 5y CDS with a Par Spread of 300bp on a full running spread convention, the risky annuity at inception is 4.8. The assumed recovery is 40%. Six months later, the spread moves to 350bp and the investor enters an offsetting trade by selling protection. The risky annuity is now 4.2. What is the total P&L on the trade? (5 marks) b) After the offsetting trade has been entered, the spread of the ABC Corp CDS in the market widens to 800bp and the risky annuity falls to 2.5 (instantaneously, no passage of time). What is the total P&L after this move and why does it occur even after the trade has been closed out? (5 marks) c) An investor buys protection on XYZ Corp 5y protection at Flat Spread 290bp using a fixed coupon plus upfront convention. The fixed coupon is 500bp and the risky annuity is 4.6. What is the initial upfront and does the investor pay or receive this? (3 marks) d) After three months, the spread increases to 600bp and the new risky annuity is 3.7. What is the total P&L on this trade to date? (5 marks) e) If the investor exits the trade by entering an offsetting trade with a 500bp fixed coupon will they have any exposure to future defaults? (2 marks) Question 1 [TOTAL 30 marks] a) Define the terms of a dividend swaps contract, providing details on the implied/realised legs and the buyer/seller convention. (3 marks) b) Define the inception date, start date and end date of a dividend swap. Provide an example. (3 marks) c) Write the formula of the payout at expiry of a dividend swap. (3 marks) d) Write the formula for the mark-to-market of a dividend swap prior to expiry. (3 marks) e) Explain what the pulled to realised effect is and how it affects the term structure of implied dividends. (6 marks) f) You sold 3000 Euro STOXX 50 (SX5E) 2017 dividend futures at a strike of 103 and bought 2500 Euro STOXX 50 (SX5E) 2019 dividend futures at a strike of 95. At expiry of the 2017 contract the SX5E realised dividend index stands at 117, while the prevailing price for the 2019 dividend futures is 120. Calculate your overall P/L (contract value per ip = EUR 100). (6 marks) g) Stock XYZ is a constituent of the ABC index. The number of XYZ shares outstanding (NOSH) is 5000 and the free float factor (FF) of 0.8. XYZ went ex-dividend today and paid its annual regular dividend of 1.2 EUR per shares. What the contribution of XYZ's dividend in index points, knowing that both the index and the company are expressed in Euro, and that the index divisor is 6400? (6 marks) Question 2: Marking CDS trades to Market (30 marks) a) An investor buys protection on ABC Corp 5y CDS with a Par Spread of 300bp on a full running spread convention, the risky annuity at inception is 4.8. The assumed recovery is 40%. Six months later, the spread moves to 350bp and the investor enters an offsetting trade by selling protection. The risky annuity is now 4.2. What is the total P&L on the trade? (5 marks) b) After the offsetting trade has been entered, the spread of the ABC Corp CDS in the market widens to 800bp and the risky annuity falls to 2.5 (instantaneously, no passage of time). What is the total P&L after this move and why does it occur even after the trade has been closed out? (5 marks) c) An investor buys protection on XYZ Corp 5y protection at Flat Spread 290bp using a fixed coupon plus upfront convention. The fixed coupon is 500bp and the risky annuity is 4.6. What is the initial upfront and does the investor pay or receive this? (3 marks) d) After three months, the spread increases to 600bp and the new risky annuity is 3.7. What is the total P&L on this trade to date? (5 marks) e) If the investor exits the trade by entering an offsetting trade with a 500bp fixed coupon will they have any exposure to future defaults? (2 marks) Question 1 [TOTAL 30 marks] a) Define the terms of a dividend swaps contract, providing details on the implied/realised legs and the buyer/seller convention. (3 marks) b) Define the inception date, start date and end date of a dividend swap. Provide an example. (3 marks) c) Write the formula of the payout at expiry of a dividend swap. (3 marks) d) Write the formula for the mark-to-market of a dividend swap prior to expiry. (3 marks) e) Explain what the pulled to realised effect is and how it affects the term structure of implied dividends. (6 marks) f) You sold 3000 Euro STOXX 50 (SX5E) 2017 dividend futures at a strike of 103 and bought 2500 Euro STOXX 50 (SX5E) 2019 dividend futures at a strike of 95. At expiry of the 2017 contract the SX5E realised dividend index stands at 117, while the prevailing price for the 2019 dividend futures is 120. Calculate your overall P/L (contract value per ip = EUR 100). (6 marks) g) Stock XYZ is a constituent of the ABC index. The number of XYZ shares outstanding (NOSH) is 5000 and the free float factor (FF) of 0.8. XYZ went ex-dividend today and paid its annual regular dividend of 1.2 EUR per shares. What the contribution of XYZ's dividend in index points, knowing that both the index and the company are expressed in Euro, and that the index divisor is 6400? (6 marks)

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Answer Answer Question 2 a The total PL on the trade can be calculated as the difference between the initial Par Spread and the final Par Spread adjusted for the change in risky annuity Initial Par Sp... View the full answer