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3. (10 marks) Consider a 3-year interest-rate swap with a counterparty initially rated B and a notional of $100 million. The following table shows the
3. (10 marks) Consider a 3-year interest-rate swap with a counterparty initially rated B and a notional of $100 million. The following table shows the cumulative default probability (Ct) for B-rated firms, the annual expected credit exposure (ECE )t for this swap and the present value discount factors (DFt) at different points in time. a) What is the marginal default rate of year 3 for B-rated firms? (2 marks) b) If the recovery rate is 20%, what is the present value of expected credit losses (PVECL) for this swap? (8 marks) 3. (10 marks) Consider a 3-year interest-rate swap with a counterparty initially rated B and a notional of $100 million. The following table shows the cumulative default probability (Ct) for B-rated firms, the annual expected credit exposure (ECE )t for this swap and the present value discount factors (DFt) at different points in time. a) What is the marginal default rate of year 3 for B-rated firms? (2 marks) b) If the recovery rate is 20%, what is the present value of expected credit losses (PVECL) for this swap? (8 marks)
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