Suppose a life insurance company issued $100 million of five-year Guaranteed Investment Contracts that commit it to pay a fixed rate of 3% semi-annually. Suppose the company is able to invest $100 million in a five-year semi-annual floating rate instrument yielding 6- month LIBOR plus 100 basis points. a. Describe the interest exposure by the insurance company. At what point would the company not be able to earn enough on the floating rate instrument to pay for its fixed obligations? State exactly where the exposure is floating rates increasing or decreasing b. Suppose there are two products available in the market for a 5-year fixed-floating interest rate swap with a notional amount of $ 100-million with the following terms: - receive fixed 2.5% semi-annually - pay 6-month LIBOR OR receive 6 month LIBOR pay fixed 2.5% semi-annually Which of the options would you choose? Using your chosen swap, how can the insurance company use this swap to hedge its interest rate exposure? c. Calculate the spread the company would lock in if it chose to enter the swap agreement of your choosing. Suppose a life insurance company issued $100 million of five-year Guaranteed Investment Contracts that commit it to pay a fixed rate of 3% semi-annually. Suppose the company is able to invest $100 million in a five-year semi-annual floating rate instrument yielding 6- month LIBOR plus 100 basis points. a. Describe the interest exposure by the insurance company. At what point would the company not be able to earn enough on the floating rate instrument to pay for its fixed obligations? State exactly where the exposure is floating rates increasing or decreasing b. Suppose there are two products available in the market for a 5-year fixed-floating interest rate swap with a notional amount of $ 100-million with the following terms: - receive fixed 2.5% semi-annually - pay 6-month LIBOR OR receive 6 month LIBOR pay fixed 2.5% semi-annually Which of the options would you choose? Using your chosen swap, how can the insurance company use this swap to hedge its interest rate exposure? c. Calculate the spread the company would lock in if it chose to enter the swap agreement of your choosing