Can someone advise if the answer I provided was correct Question:

A hedge fund is currently engaged in a plain vanilla interest rate swap with a company named BlueTrade. Under the terms of the swap, the hedge fund receives six-month LIBOR and pay 5 percent per annum on a principle of $100 million for five years. Payments are made every 6 months at rear. Assume that the interest rates start to soar after two years and BlueTrade defaults on the sixth payment date when the LIBOR rate is 8 percent for all maturities (with semi-annual compounding). The 6-months LIBOR rate 6-months ago is 7.5 percent. What is the loss to the hedge fund?

My Answer:

Interest received = six-month LIBOR

Interest paid = 5% (fixed)

Notional principal = 100000000

At year 2.5, LIBOR = 7.5%

Payments are made semi-annually, so we divide the annual interest rate by 2

Amount due to receive at the end of year 3 = (7.5%/2)* 100,000,000 = 3,7500,000

Amount due to pay at the end of year 3 = (5%/2)* 100,000,000 = 2,500,000

Therefore, immediate loss = 3,7500,000 - 2,500,000 = 1,250,000