PPT Slide
The combined risk faced by the Protection Buyer:
- default of the BBB-rated bond
- default of the Protection Seller on the contingent payment
The AAA-rated Protection Buyer creates a synthetic AA-asset with
a coupon rate of LIBOR + 90bps - 50bps = LIBOR + 40bps.
This is better than LIBOR + 30bps, which is the coupon rate of a
AA-asset (net gains of 10bps).