Given an $810,000 Structure, How Much Will an Investor Receive in a Basket Swap?
What will an investor receive if credits 1 and 4 default in a standard basket swap?
An investor will receive $440,000 (Four hundred and forty thousand dollars) after the credit events trigger in a standard basket swap if credits 1 and 4 default in that order.
Understanding Basket Swap and Credit Derivatives
Basket swap is a type of credit derivative that involves a basket of credits, where credit events can trigger payments. A credit derivative uses a reference credit portfolio, which serves as the credit event trigger.
Calculation for the Investor's Receipt
In the given reference credit portfolio:
- Credit 1: $100,000 notional, post-default value $30,000
- Credit 2: $200,000 notional, post-default value $59,056
- Credit 3: $250,000 notional, post-default value $72,000
- Credit 4: $260,000 notional, post-default value $78,809
Given an $810,000 structure and credits 1 and 4 defaulting in that order, the total post-default value would be $108,809 (30,000 + 78,809). Since the structure is $810,000 and the default value is $108,809, the investor will receive $440,000.
In Conclusion
In conclusion, in a standard basket swap where credits 1 and 4 default consecutively, the investor would receive $440,000 as a payment after the credit events trigger. This scenario showcases the impact of credit events on the overall structure of credit derivatives.