The buyer of a 2 year CDS pays 5000 Euros every quarter to the seller of the swap. The notional principal of the CDS is 1 million Euros. The recovery rate is 60%. The CDS spread in basis points is________ what is the average PD over 2 years in decimals. Assume that 5 year CDS for the same reference entity has a CDS spread of 250 basis points what is the average PD between year 2 and 5 in decimals Assume that a 5-year CDS for the same reference entity has a CDS spread of 250 bps. What is the average PD between year 2 and 5.

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Swaps

A swap is a derivative contract in which two parties are agreed to exchange their cash flows from two different financial instruments for a defined period. In swap contracts, cash flows from one financial instrument are fixed and cash flow from other financial instruments is variable based on the interest rate, exchange rate, and commodity price. Swap contracts are transacted in an over-the-counter system. Swap contracts are utilized to hedge risk and mitigate loss.