Question: 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

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 ago 12-month LIBOR was 3.5% (with annual compounding). Show the detailed steps.

a) What is the value of the swap to the financial institution today? (8 marks) b) What is the financial institution's credit exposure on the swap? That is, what if the counterparty of the financial institution defaults? (2 marks)

Select one:

a.$0

b.$100,000,000

c.$2,000,000

d.$494,175

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