Suppose that an investor buys a 5-year corporate bond yielding 8% for its face value and at the same time enters into a 5-year CDS to buy protection against the issuer of the bond defaults. Suppose that the probability of a reference entity defaulting during a year conditional on no earlier default is 1.5%+ Y. Assume that defaults always happen halfway through a year and that payments on the credit default swap are made once a year, at the end of each year. We also assume that the risk-free interest rate is 6% per annum with continuous compounding and the recovery rate is 35% Calculate the CDS premium using I a. The risk-neutral probability approach. b. The actuarial approach c. The band credit spread approach. d. Describe main types of Credit Derivatives (Risk and Return aspects)