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a) A senior economist said A bank loan has lesser default risk than a corresponding swap based on the same notional principle and that is
a) A senior economist said "A bank loan has lesser default risk than a corresponding swap based on the same notional principle and that is why the subprime crisis occurred due to the implosion of credit default swaps". Critically evaluate this statement. [10 marks] b) A financial institution has agreed to pay 8% per annum and receive three-month SOFR in return on a notional principal of $150 million with payments being exchanged every three months. The swap has a remaining life of 13 months. The average of the bid and offer fixed rates currently being swapped for three-month SOFR is 9% per annum for all maturities with continuous compounding. The threemonth SOFR rate two months ago was 7.5% per annum. What is the value of the swap? a) A senior economist said "A bank loan has lesser default risk than a corresponding swap based on the same notional principle and that is why the subprime crisis occurred due to the implosion of credit default swaps". Critically evaluate this statement. [10 marks] b) A financial institution has agreed to pay 8% per annum and receive three-month SOFR in return on a notional principal of $150 million with payments being exchanged every three months. The swap has a remaining life of 13 months. The average of the bid and offer fixed rates currently being swapped for three-month SOFR is 9% per annum for all maturities with continuous compounding. The threemonth SOFR rate two months ago was 7.5% per annum. What is the value of the swap
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