Ultimate access to all questions.
Explanation:
The bank is paying floating and receiving fixed. Under the given setup, the swap’s value to the bank is negative, while the bank’s counterparty has positive value.
However, current credit exposure is the amount exposed to default when the position is in the money. Since the bank’s position is not in the money, its current exposure is zero.
If interest rates rise from 5.0% to 5.5%, the negative value of the swap to the bank becomes more negative, but zero remains zero for current exposure.
Correct answer: B. No change
No comments yet.
Question 177.4. A bank is paying 6-month LIBOR in exchange for receiving a fixed rate of 4.0% (with semi-annual compounding). The notional is $100 million, and the swap has a remaining life of 18 months. The LIBOR/swap zero curve is flat at 5.0%. If the LIBOR/swap curve shifts up 50 basis points, from 5.0% to 5.5%, what is the change to the bank's current credit exposure?
A
Decreases
B
No change
C
Increases
D
Need more information