Suppose that in Problem 12.7 the 6-month forward rate is also 1.50 and the 6-month dollar risk-free
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Suppose that in Problem 12.7 the 6-month forward rate is also 1.50 and the 6-month dollar risk-free interest rate is 5% per annum. Suppose further that the 6-month dollar rate of interest at which the counterparty can borrow is 5.5% per annum. Estimate the present value of the cost of defaults assuming that defaults can occur either at the 6-month point or at the 1-year point? (If a default occurs at the 1-month point, the company's potential loss is the market value of the contract.)
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