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# P1.T3.409. Interest rate and currency swaps

#### Nicole Seaman

##### Director of FRM Operations
Staff member
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Questions:

409.1. In an interest rate swap with semiannual payments, StreetBase Bank has agreed to pay a fixed rate of 4.0% per annum with semiannual compounding and receive six-month LIBOR on a notional of USD 100 million. The swap has remaining maturity of 15 months. The LIBOR curve is flat at 2.0% per annum with continuous compounding for all maturities (out to 15 months), including the six-month LIBOR at the last payment date was also 2.0% (but with semiannual compounding). Which is nearest to the value of the swap to StreetBase Bank?

a. -$4.88 million (negative 4.88 million) b. -$2.95 million (negative 2.95 million)
c. Zero
d. +3.40 million (positive 3.40 million)

409.2. A currency swap with a remaining life of 15 months exchanges payments once a year: interest at 10.0% on EUR €70 million is exchanged for interest at 5.0% on USD $100 million. The term structure of rates is currently flat in the Eurozone and the United States. If the swap were negotiated today the interest exchanges would be 4.0% in dollars and 3.0% in euros. All interest rates are quoted with annual compounding. The current EUR/USD exchange rate is$1.25 with EUR as base and USD as quote currency; that is, $1.25 "quote" dollars per €1.0 "base" euro. Which is nearest to the value of the currency swap to the counterparty who is paying US dollars? a. -$3.5 million
b. Zero
c. +11.7 million
d. +23.8 million

409.3. Four years ago, Cantrans Bank entered into a five-year interest rate swap with a counterparty. Payments are made every six months. It is currently the end of the fourth year but the counterparty is defaulting on this payment; i.e., the counterparty will not make this eighth swap payment (out of ten total payments during the swap's life). Under the swap's terms, Cantrans receives a fixed rate of 4.0% per annum and pays six-month LIBOR. Six months ago, the six-month LIBOR was 3.0% per annum with semi-annual compounding but the LIBOR has since shifted down and is now flat at 2.0% for all maturities with semi-annual compounding. Which is nearest to the loss experienced by Cantrans Bank (aka, its credit exposure)?

a. Zero (the value to the swap is negative to Cantrans: has no credit exposure)
b. $433,300 c.$2.485 million
d. \$113.6 million

Answers here:

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