A client of a financial institution that is a counterparty to a four-year plain-vanilla interest rate swap has declared bankruptcy. Exactly 16 months remain until the swap matures. In the swap, the financial institution receives 4% per annum fixed rate and pays six-month Australian dollar (AUD) libor based on a principal of AUD10 million. The next floating rate payment would have been at the rate of 3.5% p.a. For all maturities, the continuously compounded AUD interest rate is 3% per annum. What is the value of the potential loss to the financial institution?
A client of a financial institution that is a counterparty to a four-year plain-vanilla interest rate swap has declared bankruptcy. Exactly 16 months remain until the swap matures. In the swap, the financial institution receives 4% per annum fixed rate and pays six-month Australian dollar (AUD) libor based on a principal of AUD10 million. The next floating rate payment would have been at the rate of 3.5% p.a. For all maturities, the continuously compounded AUD interest rate is 3% per annum. What is the value of the potential loss to the financial institution?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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A client of a financial institution that is a counterparty to a four-year plain-vanilla interest rate swap has declared bankruptcy. Exactly 16 months remain until the swap matures. In the swap, the financial institution receives 4% per annum fixed rate and pays six-month Australian dollar (AUD) libor based on a principal of AUD10 million. The next floating rate payment would have been at the rate of 3.5% p.a. For all maturities, the continuously
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