What if prime suddenly increased 200 basis points

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North-Northwest Bank (NNWB) has a differential advantage in issuing variable-rate mortgages, but does not want the interest income risk associated with such loans. The bank currently has a portfolio of $25,000,000 in mortgages with an APR of prime +150 basis points, reset monthly. Prime is currently 4%. An investment bank has arranged for NNWB to swap into a fixed interest payment of 6.5% on a notional amount of $25,000,000 in return for its variable interest income. If NNWB agrees to this, what interest is received and given in the first month?

What if prime suddenly increased 200 basis points? The customer enters into a position in June futures to fully hedge her position. When June arrives, the actual exchange rate is $1.725 per pound. How much did she save?

Reference no: EM131129452

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