Problem
A year ago, a bank entered into a $62 million ?ve-year interest rate swap. lt agreed to pay company A each year a ?xed rate of 6% and to receive in return LIBOR. When the bank entered into this swap, LIBOR was 596, but new interest rates have risen, so on a four-year interest rate swap the bank could expect to pay 6.5% and receive LIBOR.
1. Is the swap showing a pro?t or loss to the bank?
2. Suppose that at this point company A approaches the bank and asks to terminate the swap. lf there are four annual payments still remaining, how much should the bank charge A to terminate?