Suppose you are a risk manager at a financial institution, and your company has loaned a significant amount of 500 crore to a company X Ltd. for a…
CA Final · Advanced Financial Management · MTP · November 2024
Suppose you are a risk manager at a financial institution, and your company has loaned a significant amount of 500 crore to a company X Ltd. for a period of 3 years at 6-month at MCLR plus 200 bps. You are concerned about X Ltd.'s ability to repay the debt due to recent market volatility. To protect your institution from potential default, you decide to purchase a Credit Default Swap (CDS) from ABC Bank Ltd. for same notional amount at a premium quoted at 1% per year through cash settlement. On the respective reset dates for the same period actual MCLR interest rate comes out as follows: Reset MCLR 1 9.75% 2 10.00% 3 10.25% 4 10.35% 5 10.50% 6 10.60% Based on above case scenario answer the following questions:
Suggested Answer and Working Notes:
Correct Answer: Option (B)
to protect against default risk of a debt obligation.
Topics: Interest Rate Risk Management
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