Regular credit default swap and a binary credit default swap

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Reference no: EM131240265

a. Explain the difference between a regular credit default swap and a binary credit default swap.

b. A credit default swap requires a semiannual payment at the rate of 60 basis points per year. The principal is $300 million and the credit default swap is settled in cash. A default occurs after 4 years and 2 months, and the calculation agent estimates that the price of the cheapest deliverable bond is 40% of its face value shortly after the default. List the cash flows and their timing for the seller of the credit default swap.

Reference no: EM131240265

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