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A financial institution has entered into an interest rate swap with company Z. Under the terms of the swap, it receives 6% per annum and

A financial institution has entered into an interest rate swap with company Z.

Under the terms of the swap, it receives 6% per annum and pays six-month 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 4% per annum halfway through year 3 and that at the time of default all OIS rates are 2% per annum.

OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding.

The loss to the financial institution is?

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