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

The spot rate 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 4.38% (both annual compounding). The swap now has two and a half years to run 6 months ggg 12-month LIBOR was 3.5% (with annual compounding).

What is the value of the swap to the financial institution today?

What is the financial institution's credit exposure on the swap?

That is, what if the counterparty sbf the ﬁnancial institution defaults?

Step by Step Solution

★★★★★

3.42 Rating (149 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

SOLUTION To value the swap we need to calculate the present value of the remaining cash flows using ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...

Some time ago a company entered into a forward contract to buy 1 million for $1.5 million. The contract now has six months to maturity. The daily volatility of a six-month zero-coupon sterling bond...

Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...

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...

I'm studying for a test and am not sure if I have the right answers to these problems. Practice Problems SWAPS 1. Company X wishes to borrow U.S. dollars at a fixed rate of interest. Company Y wishes...

It's a case study of GM ( read corp 2.docx). Want to know the answer of Q1, Q2, Q3, Q4 ( from corp.docx) General Motors Stephane Bello, an analyst in the Capital Markets group at General Motors (GM),...

Evaluate the potential gains and losses for forwards,future,call options,put options and swaps. Outline and describe the different risks that each type of derivative contract faces. Describe...

Hi, I am doing a project for derivatives class and I have some questions about a regression and Monte Carlo simulation that I need to come up with. So the goal is to hedge against CDS instruments by...

Hi, I have a few questions to ask: 1.Consider the cash flow pattern of the CDS in Exhibit 2. One way to think about a credit default swap is that its cash flows can be replicated with long and short...

Assignment 1: Forwards and Futures, Interest Rate Derivatives and Swaps Due: Monday, February 15, 2015 All assignments are due on Monday 15th February 2015 by 6:00 p.m. at the latest. Late...

Prove that the Q R factorization of a matrix is unique if all the diagonal entries of R are assumed to be positive.

In a two-slit interference pattern, the intensity at the peak of the central maximum is I0. (a) At a point in the pattern where the phase difference between the waves from the two slits is 60.0, what...

The beta of market portfolio is: Group of answer choices + 1 . 0 + 0 . 5 0 - 1 . 0

Ivanhoe Company, organized in 2019, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2020. 1/2/20 Purchased...

Q5. (6x3 Pts) write the scripts to produce the following matrices: 3 6 9 12 15 18 a) A = equally spaced 6 numbers between 3 and 3 \equally spaced in log scale 6 numbers between 1 and 100/ b) B=(A...

This is a full study question. Is someone able to answer all components (a and b) for me? Gold sells at $1,209.10 per ounce. It has a convenience yield denoted by y and a storage cost u = 4% (per...

You deposited $9000 in a guaranteed investment account earning an APR of 6% with compounding 10 times per year. What will the account balance be by the end of 10 years?

The bank forecasts the following one-year interest rates one, two, and three years in the future: 4.56%, 4.78%, and 4.98. The current four-year interest rate is 4.71%. Estimate the current one-year...

(1 point) Find the gradient of the function f(x,y,z)=z3ln(xy),at the point (1,e,1)gradf(1,e,1)=

Suppose that a bank buys an option from a client. The option is uncollateralized and there are no other transactions outstanding with the client. The expected values of the option at the mid-point of...

The variable S is an investment asset providing income at rate measured in currency A. It follows the process dS = S S dt + S S dz in the real world. Defining new variables as necessary, give the...

A trader wishes to compute the price of a one-year American call option on a five-year bond with a face value of 100. The bond pays a coupon of 6% semiannually and the (quoted) strike price of the...

Once you have written the first draft, what should you do? a. Submit it to the instructor, as your first draft is usually the best effort. b. Let it sit a few days before going back over it to make...

What learning aid gives the student the ability to more effectively read and remember material? a. chapter summaries b. content maps c. SQ3R d. practice quizzes

Which of the following would be a more manageable topic for a term paper?