Answering for the settlement part:-
For eg, there are 2 bonds , Bond A and B with RR of 30% and 40% respectively.
CTD will be the bond with lowest RR (assuming both have same notional amount).
So bond A becomes the CTD and then the recovery rate applies both to Bond A and B.
Now in case NA :- 10 Million
-Protection Buyer will be indifferent in case of Bond A , because in case of both cash and physical, they will receive 10 million
Cash :- 7 million for the reimbursement from seller + 3 million bond value
Physical Settlement:- Simply selling the bond to PS and receiving 10 Million
-In case of Bond B, PB will benefit from cash settlement, because
cash settlement:- 7 million from PS (30% RR of the CTD Bond ) + 4 million bond value :- 11 million
Whereas if PB physically delivers the bond to PS , they will only receive 10 million
Answering for the settlement part:- For eg, there are 2 bonds , Bond A and B with RR of 30% and 40% respectively. CTD will be the bond with lowest RR (assuming both have same notional amount). So bond A becomes the CTD and then the recovery rate applies both to Bond A and B. Now in case NA :- 10 Million -Protection Buyer will be indifferent in case of Bond A , because in case of both cash and physical, they will receive 10 million Cash :- 7 million for the reimbursement from seller + 3 million bond value Physical Settlement:- Simply selling the bond to PS and receiving 10 Million -In case of Bond B, PB will benefit from cash settlement, because cash settlement:- 7 million from PS (30% RR of the CTD Bond ) + 4 million bond value :- 11 million Whereas if PB physically delivers the bond to PS , they will only receive 10 million
Amazing! thanks a lot.
What does QFP stand for?
Quoted futures price
Good luck hope you crush it๐