An AA+ rated company has entered a 5-yr cross-currency swap with a bank. The swap is documented under a CSA with the following collateral terms: Margin call freq: daily. Threshold, initial margins, and minimum transfer amounts are linked to its

An AA+ rated company has entered a 5-yr cross-currency swap with a bank. The swap is documented under a CSA with the following collateral terms:

Margin call freq: daily. Threshold, initial margins, and minimum transfer amounts are linked to its credit quality:

Rating	Initial Margin	Threshold	Minimum transfer Amount
AAA/Aaa	0%	$250m	$5m
AA+/Aa1	0%	$150m	$2m
AA/AA2	0%	$100m	$2m
AA-/AA3	0%	$50m	$2m
A+/A1	0%	0	$1 million
A/A2	1%	0	$1 million
A-/A3	1%	0	$1 million
BBB+/Baa1	2%	0	$1 million

Assuming the company has an $100m MTM loss by the end of the first day, what’s the collateral amount required

On the second day, the company suffers another $53m MTM hit. Calculate the total collateral amount required

On the third day, the company loses another $3.5m MTM and gets downgraded to A+. Calculate the total collateral amount required

Day	MTM	Change in MTM	Collateral	Commentary
1	100	100	?
2	153	53	?
3	156.5	3.5	?	Downgraded to A+

• Expert Answer

To calculate the collateral amount required for each day we need to determine the applicable margin View the full answer