Calculate the amount at risk of a credit loss in the following examples. You may wish to refer back to previous chapters to determine how to do these calculations.
A. A party goes long a forward contract on one euro denominated in dollars in which the underlying is the euro. The original term of the contract was two years, and the forward rate was $0.90. The contract now has 18 months to go. The spot rate is $0.862. The U.S. interest rate is 6 percent, and the euro interest rate is 5 percent.
The interest rates are based on discrete compounding/discounting. Determine the amount at risk of a credit loss and which party currently bears the risk.
B. Consider a plain vanilla interest rate swap with two months to go before the next payment. Six months after that, the swap will have its final payment. The swap fixed rate is 7 percent, and the upcoming floating payment is 6.9 percent. All payments are based on 30 days in a month and 360 days in a year. Two month LIBOR is 7.250 percent, and eight month LIBOR is 7.375 percent. Determine the amount at risk of a credit loss and which party currently bears the risk. Assume a $1 notional principal.
C. A party has sold an option on a stock for $35. The option is currently worth $46, as quoted in the market. Determine the amount at risk of a credit loss and which party currently bears the risk.