Is credit risk eliminated for the protection buyer

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In a credit default swap contract, a protection buyer pays a premium to the protection seller, in exchange for payment if a credit event occurs. Assume the protection buyer enters a one-year credit default swap on a notional of $100 million worth of 10-year bonds issued by XYZ. The swap entails an annual payment of 50bp. How much will the protection buyer pay to the protection seller at the beginning of the year? How much will he receive from the protection seller if XYZ defaults within this year on this bond, which trades at 40 cents on the dollar after default? Is credit risk eliminated for the protection buyer?

Reference no: EM132020712

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