(20 Points) You work in the Treasury Department of Erkis Bank. Erkis Bank has entered into an interest rate swap with Hogan Manufacturing Company (a non-financial company) using bilaterally clearing where Erkis Bank is paying a fixed rate of

3.50%

and receiving LIBOR. No collateral is posted and no other transactions are outstanding between the bank and the counterparty. The yield curve is upward sloping. Compare the relative amount of credit risk the bank is taking on this swap than if the yield curve was inverted.

4. (20 Points) You work in the Treasury Department of Erkis Bank. Erkis Bank has entered into an interest rate swap with Hogan Manufacturing Company (a non-financial company) using bilaterally clearing where Erkis Bank is paying a fixed rate of 3.50% and receiving LIBOR. No collateral is posted and no other transactions are outstanding between the bank and the counterparty. The yield curve is upward sloping. Compare the relative amount of credit risk the bank is taking on this swap than if the yield curve was inverted