Answer Happy

(a) (20) Consider the iTraxx Europe 5-year index (newly
constituted). With quarterly payments and a quoted CDS spread
on the index of 24 bps, find the corresponding constant conditional
default probability (conditional on no default in earlier periods)
expressed as a default intensity. Assume a 40% recovery rate
and that the term structure of risk-free rates is flat at
3.5%.
(c) (10) If the quoted price on the equity tranche was 11.25%, what
is the implied compound correlation and what is the implied base
correlation.
Equation (25.6) : Q(t) = 1 -e -