Commonwealth Bank of Australia has entered into an interest rate swap with Virgin Airline three year ago. Under the terms of the swap, it receives 3% per annum and pays six-month LIBOR on a principal of $5 million for five years. Payment are made every six months. However due to the travel bans and isolation requirements to prevent the spread of coronavirus, many routes are cancelled, Virgin airline is facing some liquidity issues and failed on the sixth payment when the LIBOR interest rate (with semiannual compounding) is 2.4% per annum for all maturities. What is the loss to the financial institution? Assume that six-month LIBOR was 2.5% per annum halfway through year 3. Use LIBOR for discounting.
Commonwealth Bank of Australia has entered into an interest rate swap with Virgin Airline three year ago. Under the terms of the swap, it receives 3% per annum and pays six-month LIBOR on a principal of $5 million for five years. Payment are made every six months. However due to the travel bans and isolation requirements to prevent the spread of coronavirus, many routes are cancelled, Virgin airline is facing some liquidity issues and failed on the sixth payment when the LIBOR interest rate (with semiannual compounding) is 2.4% per annum for all maturities. What is the loss to the financial institution? Assume that six-month LIBOR was 2.5% per annum halfway through year 3. Use LIBOR for discounting.
Loss refers to the situation where the total cost is exceeds total revenue at the particular level of output or selling.
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