a) Solo Investment Group invested in a 5 year bond issued by XQ for 2...
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a) Solo Investment Group invested in a 5 year bond issued by XQ for 2 years. The bond amount is $50M with an annual coupon rate 6%. It worries the recent market fluctuation and wants to transfer the default risk to another party through credit default swap. The annual payment to the counterparty is 800bp on notional. Illustrate the structures of credit default swap and total return swap with labels on the diagrams. (10 marks)
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b) The bond fund manager of Solo Investment Group also considers swapping its portfolio return with a stock index fund, StockPro, using a total return swap. The bond portfolio has a size of $400M and provides a fixed coupon of 5.8% per year. Illustrate the structure the total return swap with labels on the diagrams. (10 marks)
a) Solo Investment Group invested in a 5 year bond issued by XQ for 2 years. The bond amount is $50M with an annual coupon rate 6%. It worries the recent market fluctuation and wants to transfer the default risk to another party through credit default swap. The annual payment to the counterparty is 800bp on notional. Illustrate the structures of credit default swap and total return swap with labels on the diagrams. (10 marks)
b) The bond fund manager of Solo Investment Group also considers swapping its portfolio return with a stock index fund, StockPro, using a total return swap. The bond portfolio has a size of $400M and provides a fixed coupon of 5.8% per year. Illustrate the structure the total return swap with labels on the diagrams. (10 marks)
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