Suppose that an investor has purchased $250 million of protection on the iTraxx Europe which is an equally-weighted index composed of 125 European investment-grade names.If one of the names in the index were to default,the protection seller compensates the buyer for the loss-given-default on that name on a notional of _________________,the index continue to trade on _______________ names;and all subsequent premium payments are based on a notional of______________.

Question

Quizplus · Accepted Answer

The notional amount for each name in the index is $2 million ($250 million / 125 names). If one name defaults, the index continues with 124 names, and the notional amount for premium payments is reduced by $2 million to $248 million.

Suppose That an Investor Has Purchased $250 Million of Protection