a. Bank made a $200M loan at 12%. The bank wants to hedge the exposure by entering a TRS with a counterparty. The bank promises to pay the interest on the loan plus the change in market value in exchange for LIBOR+40bp. If after one year the market value of the loan decreased by 3% and LIBOR is 11% what is the net obligation of the bank?
b. A credit spread option has a notional of $100M with a maturity of one year. The underlying security is a 8% 10-year bond issued by corporation XYZ. The current spread is 150bp against 10- year Treasuries. The option is European type with a strike of 160bp. Assume that at expiration Treasury yield has moved from 6.5% to 6% and the credit spread widened to 180bp.

Answer rating: 100% (QA)

a The net obligation of the bank is the interest on the loan plus LIBOR40bp3 So the net obligation o... View the full answer