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Question
An FI has entered a $100 million swap agreement with a counterparty. The fixed-payment portion of the swap is similar to a government bond with maturity of 6 years and duration of 5 years. The swap payment interval is 1 year. If the relative shock to interest rates [ΔR/(1 + R)] is a decline of 50 basis points, what will be the change in market value of the swap contract?
A. +$2.0 million.
B. -$2.0 million.
C. +$2.5 million.
D. -$2.5 million.
E. More information is needed.
Answer
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