is my answer correct:

Question: 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.

Answer:

The risk is that liability is at fixed rate of 5% and asset is at floating rate of LIBOR+0.5%. Hence, if there is adverse movement in LIBOR, the floating rate payment received could be lower than the fixed rate payment due.

From the swap arrangement, the net receipt = 4.75%-LIBOR

Hence, total interest received (%) = (LIBOR+0.5% from floating rate note) + (4.75%-LIBOR from swap arrangement) = 4.80%

Since payment is on semi-annual basis, cash flow as a percent of notional amount at each payment date = 4.8%/2 = 2.4%

Therefore, cash flow from this arrangement at each payment date = 2.4%*100000000 = 2,400,000

Cash payment liability to pension fund holder at each payment date = (5%/2)*100000000 = 2,500,000

Excess cash at each payment date = 2,400,000 2,500,000 = -100,000

Hence, from this arrangement, cash flow is insufficient for pension fund holder