Hi,
I think answer is wrong. Question uses credit default swap.
We are given Economic slowdown has greater impact on lower-rated issuers. For tactile position, given that spreads rise by 50% for investment grade and double for HY.
If we expect than we buy protection for HY and sell protection for investment grade to take advantage. The answer does this but then it adds 400,000 for net premium but this does not make sense. We should subtract 400,000 for difference in coupons. If buy protection on HY, the 5% coupon is outward and for sell protection IG, the 1% coupon comes in meaning we lose $400,000.
Thank