The exchange rate is $$0\mathrm{.}80$ per franc. Assume that, at the end of year $6,$ risk$-$free interest rates are $3\%$ per annum in Swiss francs and $8\%$ per annum in U$.$S$.$ dollars for all maturities.

There are two different assumptions on risk$-$free interest rate compounding frequency.

All risk$-$free interest rates are quoted with annual compounding.

All risk$-$free interest rates are quoted with continuous compounding.

The cost of default is about $$1,200,000.$

The difference based on the two different assumptions is about $$1,200,000.$

The cost of default is about $$620,000.$

The difference based on the two different assumptions is about $$620,000.$

The difference based on the two different assumptions is about $$62,000.$

The financial institution is in favor of defaulting on company $Y.$

The loss based on the annual compounding assumption is more severe than the loss based on the continuous compounding.