Question

how to make a portfolio with bond and credit default? (how many/much contract to add)

Answer #1

There are many ways to make a portfolio one of them being making a portfolio with bond and credit default swap.

In a credit default swap **(****CDS)**
there is a swap buyer and a swap seller, where the swap seller will
compensate the swap buyer usually the face value of the bond in the
event of debt defaulting or any other credit event and the swap
buyer pays to the swap seller a particular sum of money
periodically.

Accordingly we must make a portfolio with bonds and the relevant number of credit default to compensate us in any credit event and we can constantly keep churning the portfolio i.e. keep on adding and reducing the CDS contracts according to the addition in the bonds.

What is a credit default swap? How does it indicate the
probability of default of a company? Explain

20
A portfolio manager purchased $4.5MM of credit default swap
protection for International Co. with a maturity of 5 years.
International Co’s credit spread was 380 basis points when
initially purchased but it widened to 520 basis points at the end
of the first year. Give the rough calculation of the profit for the
portfolio manager (ignoring the time value of money).
Review Later
$252,000
$170,000
$420,000
$555,000

You are considering purchasing bonds to add to your investment
portfolio. Bond A is a 15 year bond that pays a $120 annual coupon.
Bond B is a 20 year bond that pays a $80 annual coupon. Assume both
bond terms started 2 years ago and that the discount rate is 10%.
A. What are both bonds worth today? B. Would you purchase both,
neither, or one of the bonds to add to your portfolio? Why?

8.6: How is default risk different from credit
risk?

Consider a five year credit default swap with notional value $1
billion on a bond with risk neutral probability of default = 4% and
loss given default = 30%. In the event of default, the protection
seller must pay to the protection buy an amount equal to the
notional value multiplied times LGD. Assume that all cash flows
occur at the end of a year.
Estimate the CDS spread (that is, the annual percent of face
value to be paid...

deciding how much of a portfolio to invest in common stock bond and
other investment instruments is an example of tactical asset
allocation active investing strategic asset allocation passive
investing

discuss with example and diagram how is credit default swap used
to hedge risks,

a. Take a bond portfolio whose modified duration is -7; the
portfolio's value is $1,000,000. How much
will the portfolio value change if the yield rises by 1 basis point
(0.01% or 0.0001)?
b. If you want to hedge this portfolio against an increase in
yield (decline in value) using a different bond whose modified
duration is -10, will you buy or sell this hedge bond? and how much
in value (i.e. not principal amount) will you buy...

e. How many grams of HEPES (free acid) would you need to weigh
out to make 1 L of 50 mM HEPES?
f. How many mL of 1 M base (NaOH or KOH) would you need to add
to bring the pH to 7.4?
g. What components (and how much of each) would you add to a
beaker to make 1 L 50 mM HEPES, pH 7.4.

Suppose I have a $1 million worth of bond portfolio whose duration
is 20. If the interest goes up by 80 basis point, how much do I
make or lose with my portfolio?

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