Financial institution has entered into an interest rate swap

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Reference no: EM131493438

A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 4% per annum and pays 6-month LIBOR on a principal of $10 million for 5 years. Payments are made every 6 months. Suppose that company X defaults on the sixth payment date (at the end of year 3) when the six-month forward LIBOR rates for all maturities are is 2% per annum for all maturities. What is the loss to the financial institution? Assume that six-month LIBOR was 3% per annum halfway through year 3 and that at the time of the default all OIS rates are 1.8% per annum. OIS rates are express with continous compounding; other rates are express with semiannual compounding.

Reference no: EM131493438

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