Question

A CDS with a notional principal of $100 million the reference entity defaults.What is the payoff to the buyer of protection when the recovery rate is 30%? a. $100 million b. $30 million c. $130 million d. $70 million

Answer 1

option (d) $70 million

Step-by-step explanation:

Data provided in the question:

Notion principal = $100 million

The recovery rate = 30% = 0.30

Now,

The payoff to the buyer of protection will be calculated as;

Payoff = Notion principal × ( 1 - Recovery rate )

on substituting the respective values, we get

Payoff = $100 million × ( 1 - 0.30 )

or

Payoff = $100 million × 0.70

or

Payoff = $70 million

Hence,

The answer is option (d) $70 million