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A financial institution has entered into an interest rate swap with company X Under the terms of the swap, it receives 5% per annum and
A financial institution has entered into an interest rate swap with company X Under the terms of the swap, it receives 5% per annum and pays sixmonth LIBOR on a principal of $5 million for five years. Payments are made every six months. Suppose that company X defaults on the sixth payment date (end of year 3) when the six-month forward LIBOR rates for all maturities are 3% per annum. Assume that six-month LIBOR was 3.5\% per annum halfway through year 3 and that at the time of default all OIS rates are 2.5% per annum. OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding. The loss to the financial institution is closest to: a. $231,365 b. $347,048 c. $462,730 A financial institution has entered into an interest rate swap with company X Under the terms of the swap, it receives 5% per annum and pays sixmonth LIBOR on a principal of $5 million for five years. Payments are made every six months. Suppose that company X defaults on the sixth payment date (end of year 3) when the six-month forward LIBOR rates for all maturities are 3% per annum. Assume that six-month LIBOR was 3.5\% per annum halfway through year 3 and that at the time of default all OIS rates are 2.5% per annum. OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding. The loss to the financial institution is closest to: a. $231,365 b. $347,048 c. $462,730
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