The table below shows the bid/ask quotes by UBS for CDS spreads for companies A,
ID: 2823245 • Letter: T
Question
The table below shows the bid/ask quotes by UBS for CDS spreads for companies A, B, and C. CSFB has excessive credit exposure to Company C and wants to reduce it through the CDS market.
1 Year
3 Year
5 Year
A
15/25
21/32
27/36
B
43/60
72/101
112/152
C
71/84
93/113
141/170
Since the farthest maturity of its exposure to C is three years, CSFB buys a USD 150 million three-year protection on C from UBS. In order to make its purchase of this protection cheaper, based on its views on companies A and B, CSFB decides to sell USD 300 million five-year protection on Company A and to sell USD 100 million one-year protection on Company B to UBS. What is the net annual premium payment made by CSFB to UBS in the first year?
1)
2)
3)
4)
1 Year
3 Year
5 Year
A
15/25
21/32
27/36
B
43/60
72/101
112/152
C
71/84
93/113
141/170
Explanation / Answer
CSFB buys a USD 150 million three-year protection on C from UBS
Buying at an ask price of 113 = 150*113 = 16,950
CSFB decides to sell USD 300 million five-year protection on Company A
Selling at the bid price of 27 = 300*27 = 8,100
sell USD 100 million one-year protection on Company B to UBS.
Selling at the bid price of 43 = 100*43 = 4,300
Thus, annual premium paid net of premium received = 16,950 - 8,100 - 4,300 = 4,550
Thus, adjusting for scaling for CDS quotes, answer = 2) USD 0.455 million
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