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 calculated by dividing the total notional amount by the number of names in the index, which is $250 million / 125 = $2 million per name. If one name defaults, the index continues to trade on the remaining 124 names, and the notional amount for future premium payments is reduced by the notional amount of the defaulted name, resulting in a new notional of $248 million.

Suppose That an Investor Has Purchased $250 Million of Protection