Can someone help solve this question please? I couldn't find my way around it. I've been at it for quite some time now. I would appreciate any help. Thank you so much.
Consider the following term structure of spot risk-free rates: ST = {i(0,1) = 0.024; i(0,2) = 0.02; i(0,3) = 0.038}$$ST = \{i(0,1) = 0.024; i(0,2) = 0.02; i(0,3) = 0.038\}$$ and the following term structure of defaultable spot prices: ST* = {B* (0,1) = 0.71; B* (0,2) = 0.94; B* (0,3) = 0.65}$$ST^* = \{B^* (0,1) = 0.71; B^* (0,2) = 0.94; B^* (0,3) = 0.65\}$$
Determine:
- the monthly spread payed by the defaultable leg in a basis forward swap contract with a deferment period of 9 months, knowing that the periodicity of the risk-free leg is three-monthly (natural-leg indexation), while that of the defaultable floating payments (tenor indexation) is monthly;
- the generalized/modified Convexity of the swap contract evaluated on the default-free structure and the convexity adjustment of the swap.
