If the CDS spread for a regular 5-year CDS is 120 basis points, what is the CDS spread for a 5-year binary CDS on the same underlying reference entity? Assume a recovery rate of 40%
A. 48 basis points
B. 72 basis points
C. 200 basis points
D. 300 basis points
C
The payoff from a regular CDS is (1-R) times the payoff from a binary CDS where R is the recovery rate. It follows that the CDS for a binary CDS is 120/(1-0.4) or 200 basis points
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