how to get the number of time one, why the number of interest is 91518149$ 2. If you hold foreign go
how to get the number of time one, why the number of interest is 91518149$
2. If you hold foreign government bonds in Italy that are worth $100,000,000 and 7 year Credit Default Swap (CDS) protection is offered at 130, mark the following as (T)rue or (F)alse: (a) If you buy CDS protection and there is no default, you will pay $1,300,000 x 7 over the life of the swap (ignoring the time value of money) (b) The seller automatically pays the current market value of the bonds upon receiving notice of default (c) The price at time 0 for a CDS contract is .013 x $100,000,000 (d) There is low counter party risk in credit default swaps because bonds are so stable 3. If the Italian seven year bond in question 2 has a yield to maturity of .853% (85.3 basis points), has a CDS quote of 130 pips, and you can borrow risk-free in the US at 1.6% for one year, is there an arbitrage opportunity if Italy uses the Euro and the spot price for EUR/USD = $1.102 and the one year forward price is EUR/USD = $1.127? Show your calculation. (12 points) Time 0 Borrow $1,000,000 at 1.6% Buy Italian bonds (907,441 Euros) Buy CDS protection +$1,000,000 -$1,000,000 $1,031,409.54 13,412.13 $ Time 1 Sell Bonds + Interest (915,181.49) Pay CDS protection (915,441 x .013) Pay Loan +Interest 16,000.00 $ 1,997.41 Net
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