A bank enters into a 3-year swap with company X where it pays LIBOR and receives 3.00%.It enters into an offsetting swap with company Y where is receives LIBOR and pays 2.95%.Which of the following is true:
A)If company X defaults, the swap with company Y is null and void
B)If company X defaults, the bank will be able to replace company X at no cost
C)If company X defaults, the swap with company Y continues
D)The bank's bid-offer spread is 0.5 basis points

Question

Quizplus · Accepted Answer

The bank`s bid-offer spread is 5 basis points not 0.5 basis points.The bank has quite separate transactions with X and Y.If one defaults,it still has to honor the swap with the other.

A Bank Enters into a 3-Year Swap with Company X