kathy8246 kathy8246

02-05-2024
Business

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A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, the financial institution pays fixed rate of 4% per annum and receives 12 month LIBOR (annual, 30/360) on a principal of $100 million every year for five years. Interest rate (with annual compounding) moved up to 5% per annum for all maturities one year later and stayed there since then. Suppose that company X defaulted right before it made the fourth payment (at the end of year 4).
What is the value of the swap to the financial institution then (i.e. at the time when company defaulted)? Draw the cash-flow diagrams from the perspective of the financial institution and do the calculation.

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