Explain how to combine all-year zero-coupon bond and 1-year CDS on the same firm to form a risk free asset. Derive a relation between CDS price, bond price, and risk-free bond price. To simplify, assume the following:
1. The bond has face value F, the interest rate is i, the default probability d and the recovery is a random number rho between 0 and 1.
2. The CDS terms are the following:in case of a default you receive (1 - rho) F, in case of no default you receive nothing.