Exactly 32 months ago, a financial institution entered a four-year plain-vanilla interest rate swap to receive 5% per annum fixed rate and pay six-month Australian dollar (AUD) libor based on a principal of AUD10 million.However, the counterparty has declared bankruptcy, and the financial institution wishes to calculate the size of its potential loss.The next floating rate payment would have been at the rate of 4.4% p.a. For all maturities, the continuously compounded AUD interest rate is 4% per annum.

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