All interest rates are quoted with annual compounding

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Reference no: EM131603363

ABC Insurance Company has entered into a 5-year swap with EIB Enterprises. Under the terms of the swap, ABC receives interest at 1% per annum in Swiss francs and pays interest at 2% per annum in U.S. dollars. Interest payments are exchanged once per year. The principal amounts are 10 million dollars and 11 million francs. Suppose that EIB Enterprises declares bankruptcy at the end of year 4, right before the swap payment is to be made. The exchange rate at the end of year 4 is $0.85 per franc. Assume that forward rates are realized and, at the end of year 4, the interest rate is 0.5% per annum in Swiss francs and 1% per annum in U.S. dollars for all maturities. All interest rates are quoted with annual compounding. Calculate the cost to ABC at the end of year 4 due to EIB’s bankruptcy.

Reference no: EM131603363

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