A bank issues a R5 million loan to a firm with an A- credit rating. The modified duration on the loan is 4.5 years. At the time of issue, the credit spread between A- bonds and a South Africa Treasury bond is 2 percent. The bank believes that the borrowers credit rating may fall during the period of the loan. To hedge this credit risk, the bank enters (sells) a R5 million credit spread forward contract. Subsequently, at the end of the forward period, the borrowers credit rating does indeed drop to BB. You are required to do the following:

a) Determine the change in the market value of the loan to the bank (2marks)

b)Calculate the amount that will be received from hedging the credit risk (3marks)