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As a pension fund manager, you anticipate that you have to pay out 5 percent on $100 million for the next five years. The payment

As a pension fund manager, you anticipate that you have to pay out 5 percent on $100 million for the next five years. The payment is made semi-annually. You currently hold $100 million of floating-rate note that pays LIBOR + 0.5 percent. What is your potential risk?

To reduce your risk, you arrange a swap with a dealer who agree to pay you 4.75 percent fixed rate, while you pay him LIBOR. The swap payment is made semi-annually as well. Determine if you have sufficient cash flow to pension fund holder. Justify your answer.

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