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Answer: No change
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**
Author: Manit Arora
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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
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