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The swap is quoted on a semiannual basis and the 6-month LIBOR will be used for the floating leg.

1. If MSB sells a 3-year swap what will be its profit on the Bid/Ask (swap) Spread? What role does MSB play in this market. What kinds of activities does MSB do to earn its profits?
2. What three kinds of risk does MSB take on when it initiates a transaction. What kind of risk is always present? Elucidate each of the three kinds of risk.
3. CorporationBlue wants to receive fixed-rate payments instead of paying fixed rate for 3 years. The on the run TN rate is 6.53%. CB buys a 3-year swap from MSB. Calculate the fixed rate.
4. MSB finds a counterparty CorporationAqua to remove its swap exposure. What will be the fixed rate CA will pay MSB?
5. MSB now has a matched book transaction. Suppose MSB will need to hedge their risk exposure until they can find an off=setting swap. What can they do to manage the residual exposure?

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The following table shows MidSouth Bank's Indictive Swap Pricing Schedule for Treasury Notes Maturity MSB Receives Fixed MSB Pays Fixed 1 year 1-yr TN sa + 44 bps 2-yr TN sa + 39 bps 2 years 2-yr TN sa + 50 bps 2-yr TN sa +45 bps 3 years 3-yr TN sa + 54 bps 3-yr TN sa + 48 bps 4 years 4-yr TN sa + 55 bps 4-yr TN sa +49 bps 5-yr TN sa + 60 bps 5-yr TN sa + 53 bps 5 years

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