Question: 6. From Acme Bank's perspective, the mid-market value, before adjusting for counterparty credit risk, of a interest rate swap (IRS) is -$11.0 million. Therefore, the IRS has a value of +$11.0 million to Acme's counterparty, BadCredit Corp. The present-valued expected exposure faced by Acme with respect to BadCredit, EE(BadCredit), is $30.0 million with expected loss rate of 12.0%. The present-valued expected exposure faced by BadCredit with respect to Acme, EE(Acme), is $20.0 million with expected loss rate of 8.0%. BadCredit Corp wants to exit the position and assigns the swap to GoodCredit Corp, who has an expected loss rate of only 4.0% (the expected exposure will remain the same). What is the transaction between Acme and BadCredit, in order to settle the assignment? a. Acme receives $13.0 million from BadCredit Corp b. Acme receives $1.2 million from BadCredit Corp c. Acme pays $2.4 million to BadCredit Corp d. Acme pays $5.2 million to BadCredit Corp Answer: 6. C. Acme pays $2.4 million to BadCredit Corp Before the assignment, the CVA adjustment = 20*8% - 30*12% = -$2 million, such that the IRS swap value (from Acme' perspective) is -$11 - 2 = -$13.0 million After assignment, the CVA adjustment = 20*8% - 30*4% = $0.40 million; i.e., owing to lower counterparty exposure to GoodCredit Corp, the net value of the swap will increase to Acme. BadCredit Corp will need to receive $13.0 million (its value in the swap). GoodCredit corp will need to pay its value, in the swap, of $10.60 million; i.e., $11.00 million + (30*40% - 2-*8%). Therefore, Acme pays BadCreditCorp the balance of $2.40 million. Put more simply, the assignment causes Acme's CVA adjustment to increase from -2.0 million [i.e., 20*8% - 30*12%] to +0.4 million [i.e., 20*8% - 30*4%], which increases the CVA-adjusted mid-market value by $2.4 million.