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

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