How the credit risk for the bank changes over time

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Reference no: EM133278102

Question - Suppose that in October 2022, a pension fund and a bank entered into a 5 year Interest Rate Swap agreement starting in May 2023. In this swap, pension fund wanted to eliminate the risk if interest rates go higher in 2023, thus requested to receive market interest rate; and pay a fixed rate to the bank in return. Please explain briefly how the credit risk for the bank changes over time if the FED unexpectedly decides to lower interest rates starting in March 2023. Assume a notional of $100m, and the originally agreed annual swap rate of 6%.

Reference no: EM133278102

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