riskmanagementhw2

riskmanagementhw2 - bp): 2,500 / (1 + 0.1 *(270/360)) =...

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Credit Exposure Questions 1. b, 2. a. 3. 4.c. 5.a. 6. Solution: 7.b. 8. b.

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Using the formula to calculate the NPV of the stream of fixed interest cash flows: 9.b. 10.a. 11.b. NPV of Dollar cash flows = \$7,572,318 NPV of Swiss Franc cash flows = SwFr 10,534,602 SwFr 10,534,602 = 10,534,602 / 1.45 = \$7,265,243 The value of the swap and its replacement cost is therefore: = \$7,572,318 - \$7,265,243 = \$307,075 This amount will be paid by the affected party to the replacement swap counterparty. 12.c. 13.d. Every 1 basis point change in the interest rate payable on a principal of \$1 million for a 90-day maturity changes interest cost by:
1,000,000 * (0.0001 x 90/360) = 25 If the interest rate increases in 100 bp, then the credit exposure is the present value of 2,500 ( 25 * 100
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Unformatted text preview: bp): 2,500 / (1 + 0.1 *(270/360)) = 2325.58 14.a. . The put is in-the-money. If the stock price is below \$50, party B may not fullfill its obligation under the terms of the contract than from option counterparty. 15. Party A buys an European call option from party B at a strike price of \$50 and pays full premium upfront. . In which of the following situations does party B face counterparty credit risk? a) Stock price is below \$50 at expiry b) Stock price is above \$50 at expiry c) Party B does not face credit risk Solution: c . Party B does not face counterparty credit risk because party A has paid premium in full. 16. The exposure profile of purchased options tends to be greater than the credit risk for comparable swaps. a. True b. False Solution: a....
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This note was uploaded on 02/27/2010 for the course MA 535 taught by Professor Prasad during the Spring '10 term at Stevens.

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riskmanagementhw2 - bp): 2,500 / (1 + 0.1 *(270/360)) =...

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