Suppose that you have an existing interest rate swap with DNB (a Norwegian bank) where you receive the fixed rate portion and pay the floating rate portion, and the swap settles in arrears (i.e., the payment occurs at the end of the period). The fixed rate portion of the swap pays 3.2% annually, and the floating rate pays LIBOR plus the fourth digit of your student ID/10 in percentage terms (e.g., if the fourth digit is 9, then it would be LIBOR plus 0.9%). There are two remaining years in the swap (you can assume that the payments take place 1 and 2 years from now). The forward LIBOR rate is 2% and 2.25% for year 1 and year 2, respectively; and you can assume a constant risk-free rate of 1.9%. All rates are annualized. The principal on the swap is 5 million.

Given the parameters above, calculate the value of the swap to you today and the expected value of the swap in 1-year.

Suppose that DNB has a credit default swaps (CDS) trading on it. The CDS that expires in 1-year has a premium of 1.5%, and the one that expires in 2-years has a premium of 2% (both annualized). Assume the recovery rate is 45%. Calculate the implied default probability from year 0 to year 1, and from year 1 to year 2, and mention one advantage and one disadvantage of using CDS relative to credit ratings to calculate default probabilities.