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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: $$ST = \{i(0,1) = 0.024; i(0,2) = 0.02; i(0,3) = 0.038\}$$ and the following term structure of defaultable spot prices: $$ST^* = \{B^* (0,1) = 0.71; B^* (0,2) = 0.94; B^* (0,3) = 0.65\}$$

Determine:

  1. 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;
  2. the generalized/modified Convexity of the swap contract evaluated on the default-free structure and the convexity adjustment of the swap.
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  • $\begingroup$ Does the LGD matter? Do you make some assumptions about it? $\endgroup$ Commented Mar 3 at 23:08

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