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6 March, 06:21

A CDS with a notional principal of $100 million the reference entity defaults. What is the payoff to the buyer of protection when the recovery rate is 30%? a. $100 million b. $30 million c. $130 million d. $70 million

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  1. 6 March, 06:30
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    option (d) $70 million

    Explanation:

    Data provided in the question:

    Notion principal = $100 million

    The recovery rate = 30% = 0.30

    Now,

    The payoff to the buyer of protection will be calculated as;

    Payoff = Notion principal * (1 - Recovery rate)

    on substituting the respective values, we get

    Payoff = $100 million * (1 - 0.30)

    or

    Payoff = $100 million * 0.70

    or

    Payoff = $70 million

    Hence,

    The answer is option (d) $70 million
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