Risk from holding swap with short term interest rates

Reference no: EM13826500

Problem:

A bank purchases an interest rate swap, exchanging a fixed interest rate of 8% for a floating interest rate of LIBOR + 120 basis points, on a notional principal of £200mn. There is no arrangement fee. If the counterparty were to default, could the bank lose the £200mn? Explain why the bank is exposed to credit risk from holding this swap if short term interest rates rise, but is not exposed to credit risk if short term interest rates fall. Explain with examples the use of netting, and of margining, to reduce counterparty risk.

Summary of Question:

This question is basically belongs to the Finance as well as it explains about the bank being exposed to credit risk from holding swap with short term interest rates rising but not exposed to credit risk.

Reference no: EM13826500

Questions Cloud

Implement the strategic use of knowledge and information : This problem relates to Management and it is about how an organization can optimally utilize the information and knowledge that has been accumulated in the organization in the present context of networked and global environment

Positioning strategy of amway : Positioning Strategy Of Amway

Investment grade and speculative grade : Explain the difference between "investment grade" and "speculative grade" corporate debt. What information do rating agencies use to determine their ratings and distinguish between the two types of debt?

Company presentation reflection report : Company Presentation Reflection Report

Risk from holding swap with short term interest rates : A bank purchases an interest rate swap, exchanging a fixed interest rate of 8% for a floating interest rate of LIBOR + 120 basis points, on a notional principal of £200mn. There is no arrangement fee.

Calculate the point price elasticity of demand : The example case study is from Managerial Economics. The problem is explain about a fitness development company. The demand function needs to be interpreted along with price elasticity of demand and income elasticity of demand.

Pocket phone projector review : Pocket Phone Projector Review

Write essay on creating differential advantage : The problem belongs to Management and it is about writing an essay on Creating Differential Advantage and Managing Uncertainty in the Development and Design process

Describing impact of change in interest rates : A bank has a portfolio of residential fixed interest mortgage bonds (bonds secured on residential mortgages) with a market valuation of €3mn, and with a modified duration of D = 7 years.

User Account

All Pages