Hello,
The idea of the swap makes enough sense, but what in the world does the recovery rate represent?
The example in the book is horrible. It says if a stock goes down from 100 to anything less than 75, that we get paid notional*(1 - RR). Is the "recovery rate" just the current value of the equity compared to when you bought it? The current value compared to the "strike"? Since there isn't a par value for the stock its tough to tell exactly what this "recovery rate" is referring to.
Thanks!
SHannon
The idea of the swap makes enough sense, but what in the world does the recovery rate represent?
The example in the book is horrible. It says if a stock goes down from 100 to anything less than 75, that we get paid notional*(1 - RR). Is the "recovery rate" just the current value of the equity compared to when you bought it? The current value compared to the "strike"? Since there isn't a par value for the stock its tough to tell exactly what this "recovery rate" is referring to.
Thanks!
SHannon
