1. What is the value of the fixed payer position in an existing CDS with 2 years to maturity and a spread of 2.5%, if new 2-year CDS are trading at a spread of 1.5%. Assume the appropriate discount rate is 6%, CDS payments are made annually, and the notional principal is $100.
2. Compute the PI statistic for Project Q if the appropriate cost of capital is 12 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.)
3. What is the stochastic volatility model? Discuss the similarities and differences between a GARCH-type model and a stochastic volatility model.