Question: Question 18 3. The term structure is flat at 5% per annum with continuous compounding. Some time ago a financial institution entered into a 5-year

Question 18

3. The term structure is flat at 5% per annum with continuous compounding. Some time ago a financial institution entered into a 5-year swap with a principal of $100 million in which every year it pays 12-month LIBOR and receives 6% (both annual compounding). The swap now has two years eight months to run. Four months ago 12-month LIBOR was 4% (with annual compounding).

a) What is the value of the swap to the financial institution today? (8 marks)

Question 19

b) What is the financial institutions credit exposure on the swap? That is, what if the counterparty of the financial institution defaults? (2 marks)

Select one:

$2,000,000

$3,501,460

$100,000,000

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