Question: Table 23.7 shows the five-year iTraxx index was 77 basis points on January 31, 2008. Assume that the risk-free rate is 5% for all maturities,

Table 23.7 shows the five-year iTraxx index was 77 basis points on January 31, 2008. Assume that the risk-free rate is 5% for all maturities, the recovery rate is 40%, and payments are quarterly. Assume also that the spread of 77 basis points applies to all maturities. Use the DerivaGem CDS worksheet to calculate a hazard rate consistent with the spread. Use this in the CDO worksheet with 10 integration points to imply base correlations for each tranche from the quotes for January 31, 2008.

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