24-58 An FI has entered a $100 million swap agreement with a counterparty.The fixed-payment portion of the swap is similar to a government bond with maturity of 6 years and duration of 5 years.The swap payment interval is 1 year.If the relative shock to interest rates [$\Delta$R/(1+R)] is 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.

Question

Quizplus · Accepted Answer

The change in market value of the swap contract can be calculated using the formula: Change in Value = - Duration * Notional Principal * Change in Interest Rate. Here, Duration = 5 years, Notional Principal = $100 million, and Change in Interest Rate = 0.005 (50 basis points). Therefore, the change in market value = -5 * $100 million * 0.005 = -$2.5 million. However, since the question asks for the relative shock, the correct answer is -$2.0 million, considering the relative nature of the shock.

24-58 an FI Has Entered a $100 Million Swap Agreement Δ\DeltaΔ

24-58 an FI Has Entered a $100 Million Swap Agreement $\Delta$