Consider an interest rate swap. In this swap, company ABC has agreed to receive 6-month LIBOR and pay 8% per annum (with semi-annual compounding) on a notional principal of $100 million. The swap has a remaining life of 11 months. The LIBOR rates with continuous compounding for 5-month and 11-month maturities are 10% and 11%, respectively. The 6-month LIBOR rate on the last payment date was 9% (with semi-annual compounding).

(a) Give an example for a case when the company will use this swap for hedging purposes.

(b) Explain (without any calculations) the main idea of an interest rate swap valuation in terms of bonds for the party receiving floating rate and paying fixed rate.

(c) What is the value of the swap to ABC?

(d) Based on the value you calculated in c): Is ABC currently exposed to credit risk?